Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Yext (YEXT)
Market Cap: $772.8 million
Founded in 2006 by Howard Lerman, Yext (NYSE: YEXT) offers software as a service that helps their clients manage and monitor their online listings and customer reviews across all relevant databases, from Google Maps to Alexa or Siri.
Why Is YEXT Risky?
- Customers were hesitant to make long-term commitments to its platform as its 4% average ARR growth over the last year was sluggish
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 6.2 percentage points
Yext is trading at $6.02 per share, or 1.7x forward price-to-sales. Check out our free in-depth research report to learn more about why YEXT doesn’t pass our bar.
Skyworks Solutions (SWKS)
Market Cap: $8.60 billion
Result of a merger of Alpha Industries and the wireless communications division of Conexant, Skyworks Solutions (NASDAQ: SWKS) is a designer and manufacturer of chips used in smartphones, autos, and industrial applications to amplify, filter, and process wireless signals.
Why Do We Think SWKS Will Underperform?
- Annual sales declines of 12.7% for the past two years show its products and services struggled to connect with the market during this cycle
- Projected sales decline of 8.7% over the next 12 months indicates demand will continue deteriorating
- Efficiency has decreased over the last five years as its operating margin fell by 16 percentage points
At $54.78 per share, Skyworks Solutions trades at 10.4x forward price-to-earnings. If you’re considering SWKS for your portfolio, see our FREE research report to learn more.
Potbelly (PBPB)
Market Cap: $241.7 million
With a unique origin story where the company actually started as an antique shop, Potbelly (NASDAQ: PBPB) today is a chain known for its toasty sandwiches.
Why Are We Hesitant About PBPB?
- Annual revenue growth of 2.5% over the last five years was below our standards for the restaurant sector
- Smaller revenue base of $462.6 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Push for growth has led to negative returns on capital, signaling value destruction
Potbelly’s stock price of $8.07 implies a valuation ratio of 28.3x forward price-to-earnings. To fully understand why you should be careful with PBPB, check out our full research report (it’s free).
Stocks We Like More
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