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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Peloton (PTON)
Market cap: $2.48 billion
Started as a Kickstarter campaign, Peloton (NASDAQ: PTON) is a fitness technology company known for its at-home exercise equipment and interactive online workout classes.
Why Do We Think PTON Will Underperform?
- Performance surrounding its connected fitness subscribers has lagged its peers
- Poor expense management has led to an operating margin of 4.6% that is below the industry average
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 3.2 percentage points over the next year
Peloton is trading at $5.60 per share, or 16.7x forward P/E. Check out our free in-depth research report to learn more about why PTON doesn’t pass our bar.
Bally's (BALY)
Market cap: $636.9 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 Do We Pass on BALY?
- Lackluster 6.9% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $12.66 per share, Bally's trades at 0.3x forward price-to-sales. To fully understand why you should be careful with BALY, check out our full research report (it’s free).
Alamo (ALG)
Market cap: $1.66 billion
Expanding its markets through acquisitions since its founding, Alamo (NYSE: ALG) designs, manufactures, and services vegetation management and infrastructure maintenance equipment for governmental, industrial, and agricultural use.
Why Are We Hesitant About ALG?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Eroding returns on capital suggest its historical profit centers are aging
Alamo’s stock price of $136.50 implies a valuation ratio of 12.5x forward P/E. If you’re considering ALG for your portfolio, see our FREE research report to learn more.
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