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.
These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Sprout Social (SPT)
Market Cap: $440 million
Born from the recognition that businesses needed a centralized way to handle their growing social media presence, Sprout Social (NASDAQ: SPT) provides a comprehensive software platform that helps businesses manage, analyze, and optimize their presence across various social media networks.
Why Do We Think Twice About SPT?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 9.6% underwhelmed
- Estimated sales growth of 6.9% for the next 12 months implies demand will slow from its two-year trend
- Suboptimal cost structure is highlighted by its history of operating margin losses
Sprout Social’s stock price of $7.31 implies a valuation ratio of 0.9x forward price-to-sales. Read our free research report to see why you should think twice about including SPT in your portfolio.
Sensata Technologies (ST)
Market Cap: $6.63 billion
Originally a temperature sensor control maker and a subsidiary of Texas Instruments for 60 years, Sensata Technology Holdings (NYSE: ST) is a leading supplier of analog sensors used in industrial and transportation applications, best known for its dominant position in the tire pressure monitoring systems in cars.
Why Do We Think ST Will Underperform?
- Sales tumbled by 4.2% annually over the last two years, showing market trends are working against it during this cycle
- Projected sales growth of 4.2% for the next 12 months suggests sluggish demand
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 29.2%
Sensata Technologies is trading at $45.67 per share, or 12.1x forward P/E. If you’re considering ST for your portfolio, see our FREE research report to learn more.
Victoria's Secret (VSXY)
Market Cap: $6.58 billion
Spun off from L Brands in 2020, Victoria’s Secret (NYSE: VSXY) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.
Why Does VSXY Fall Short?
- Annual revenue growth of 2.6% over the last three years was below our standards for the consumer retail sector
- Operating margin of 4.8% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Earnings per share fell by 6% annually over the last three years while its revenue grew, partly because it diluted shareholders
At $82.90 per share, Victoria's Secret trades at 18.2x forward P/E. Dive into our free research report to see why there are better opportunities than VSXY.
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