Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Caleres (CAL)
Market Cap: $487.5 million
The owner of Dr. Scholl's, Caleres (NYSE:CAL) is a footwear company offering a range of styles.
Why Should You Sell CAL?
- Products and services aren't resonating with the market as its revenue declined by 3.8% annually over the last two years
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Caleres’s stock price of $13.70 implies a valuation ratio of 4.7x forward P/E. Dive into our free research report to see why there are better opportunities than CAL.
Methode Electronics (MEI)
Market Cap: $305.9 million
Founded in 1946, Methode Electronics (NYSE:MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Why Do We Avoid MEI?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Free cash flow margin dropped by 19.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Methode Electronics is trading at $8.57 per share, or 12.9x forward P/E. Check out our free in-depth research report to learn more about why MEI doesn’t pass our bar.
Kforce (KFRC)
Market Cap: $735.7 million
With nearly 60 years of matching skilled professionals with the right opportunities, Kforce (NYSE:KFRC) is a professional staffing company that specializes in placing technology and finance experts with businesses on both temporary and permanent bases.
Why Do We Think KFRC Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 9.8% annually over the last two years
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 11.7% annually
- Waning returns on capital imply its previous profit engines are losing steam
At $41.52 per share, Kforce trades at 16.3x forward P/E. If you’re considering KFRC for your portfolio, see our FREE research report to learn more.
High-Quality Stocks for All Market Conditions
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