Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.
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 is one small-cap stock that could be the next big thing and two that may have trouble.
Two Small-Cap Stocks to Sell:
Heartland Express (HTLD)
Market Cap: $789.3 million
Founded by the son of a trucker, Heartland Express (NASDAQ: HTLD) offers full-truckload deliveries across the United States and Mexico.
Why Should You Dump HTLD?
- Annual sales declines of 18.3% for the past two years show its products and services struggled to connect with the market during this cycle
- Free cash flow margin shrank by 12.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Heartland Express is trading at $10.19 per share, or 7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why HTLD doesn’t pass our bar.
American Outdoor Brands (AOUT)
Market Cap: $111.6 million
Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ: AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.
Why Should You Sell AOUT?
- Sales tumbled by 4.3% annually over the last five years, showing consumer trends are working against its favor
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.3% for the last two years
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
American Outdoor Brands’s stock price of $8.89 implies a valuation ratio of 32.7x forward P/E. Dive into our free research report to see why there are better opportunities than AOUT.
One Small-Cap Stock to Watch:
WD-40 (WDFC)
Market Cap: $2.90 billion
Short for “Water Displacement perfected on the 40th try”, WD-40 (NASDAQ: WDFC) is a renowned American consumer goods company known for its iconic and versatile spray, WD-40 Multi-Use Product.
Why Is WDFC Interesting?
- Unique products and pricing power result in a premier gross margin of 54.5%
- Strong free cash flow margin of 12.6% enables it to reinvest or return capital consistently
- Stellar returns on capital showcase management’s ability to surface highly profitable business ventures, and its rising returns show it’s making even more lucrative bets
At $212.19 per share, WD-40 trades at 34.8x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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