Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
PlayStudios (MYPS)
Market Cap: $59.76 million
Founded by a team of former gaming industry executives, PlayStudios (NASDAQ: MYPS) offers free-to-play digital casino games.
Why Do We Think MYPS Will Underperform?
- Sales tumbled by 4.2% annually over the last five years, showing consumer trends are working against its favor
- Poor free cash flow margin of 13.3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Returns on capital are growing as management invests in more worthwhile ventures
PlayStudios’s stock price of $0.47 implies a valuation ratio of 0.3x forward price-to-sales. To fully understand why you should be careful with MYPS, check out our full research report (it’s free).
Sleep Number (SNBR)
Market Cap: $37.57 million
Known for mattresses that can be adjusted with regards to firmness, Sleep Number (NASDAQ: SNBR) manufactures and sells its own brand of bedding products such as mattresses, bed frames, and pillows.
Why Do We Pass on SNBR?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 44% annually, worse than its revenue
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Sleep Number is trading at $1.66 per share, or 10x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SNBR in your portfolio.
Energizer (ENR)
Market Cap: $1.14 billion
Masterminds behind the viral Energizer Bunny mascot, Energizer (NYSE: ENR) is one of the world's largest manufacturers of batteries.
Why Are We Hesitant About ENR?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.9%
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $16.61 per share, Energizer trades at 4.7x forward P/E. Check out our free in-depth research report to learn more about why ENR doesn’t pass our bar.
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