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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Worthington (WOR)
Market Cap: $2.38 billion
Founded by a steel salesman, Worthington (NYSE: WOR) specializes in steel processing, pressure cylinders, and engineered cabs for commercial markets.
Why Is WOR Risky?
- Annual sales declines of 14.9% for the past five years show its products and services struggled to connect with the market during this cycle
- Earnings per share have dipped by 28.8% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Worthington is trading at $47.95 per share, or 12.8x forward P/E. If you’re considering WOR for your portfolio, see our FREE research report to learn more.
Fastly (FSLY)
Market Cap: $4.02 billion
Taking its name from the core advantage it delivers to customers, Fastly (NYSE: FSLY) operates an edge cloud platform that processes, secures, and delivers web content as close to end users as possible, enabling faster digital experiences.
Why Should You Sell FSLY?
- Struggled to drive increased usage of its software, demonstrated by its subpar 105% net revenue retention rate
- Gross margin of 57.1% reflects its high servicing costs
- Poor expense management has led to operating margin losses
Fastly’s stock price of $26.71 implies a valuation ratio of 5.7x forward price-to-sales. Check out our free in-depth research report to learn more about why FSLY doesn’t pass our bar.
Rumble (RUM)
Market Cap: $1.79 billion
Founded in 2013 as a champion for content creator rights and free expression, Rumble (NASDAQ: RUM) is a video sharing platform that positions itself as a free speech alternative to mainstream platforms, offering creators more favorable revenue-sharing opportunities.
Why Does RUM Give Us Pause?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 31.9 percentage points
- Cash burn has widened over the last five years, making us question whether it can reliably generate shareholder value
- Negative EBITDA restricts its access to capital and increases the probability of shareholder dilution if things turn unexpectedly
At $5.36 per share, Rumble trades at 20.7x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including RUM in your portfolio.
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