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.
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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Bally's (BALY)
Market Cap: $640.6 million
Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE: BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.
Why Is BALY Risky?
- Muted 2% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Bally's is trading at $13.03 per share, or 10.7x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including BALY in your portfolio.
Tecnoglass (TGLS)
Market Cap: $2.00 billion
The first-ever Colombian company to trade on the NASDAQ, Tecnoglass (NYSE: TGLS) is a manufacturer of architectural glass, windows, and aluminum products.
Why Are We Wary of TGLS?
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 5.2% annually
- Free cash flow margin shrank by 9.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $44.99 per share, Tecnoglass trades at 12.4x forward P/E. Dive into our free research report to see why there are better opportunities than TGLS.
Jefferies (JEF)
Market Cap: $7.44 billion
Tracing its roots back to 1962 and rebranded from Leucadia National Corporation in 2018, Jefferies Financial Group (NYSE: JEF) is a global investment banking and capital markets firm that provides advisory services, securities trading, and asset management to corporations, institutions, and wealthy individuals.
Why Do We Think Twice About JEF?
- Muted 4.1% annual revenue growth over the last five years shows its demand lagged behind its financials peers
- Incremental sales over the last five years were less profitable as its 1.8% annual earnings per share growth lagged its revenue gains
- High net-debt-to-EBITDA ratio of 34× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Jefferies’s stock price of $35.93 implies a valuation ratio of 9.6x forward P/E. Check out our free in-depth research report to learn more about why JEF doesn’t pass our bar.
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