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.
Central Garden & Pet (CENT)
Market Cap: $2.17 billion
Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQ: CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.
Why Does CENT Worry Us?
- Products have few die-hard fans as sales have declined by 1% annually over the last three years
- Projected sales decline of 8.2% over the next 12 months indicates demand will continue deteriorating
- Low returns on capital reflect management’s struggle to allocate funds effectively
Central Garden & Pet is trading at $37.89 per share, or 12.7x forward P/E. To fully understand why you should be careful with CENT, check out our full research report (it’s free).
Transcat (TRNS)
Market Cap: $721.9 million
Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ: TRNS) provides measurement instruments and supplies.
Why Are We Hesitant About TRNS?
- Efficiency has decreased over the last five years as its operating margin fell by 2.8 percentage points
- Earnings per share fell by 6.8% annually over the last two years while its revenue grew, partly because it diluted shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $77.32 per share, Transcat trades at 38.2x forward P/E. Read our free research report to see why you should think twice about including TRNS in your portfolio.
The Hanover Insurance Group (THG)
Market Cap: $6.71 billion
Founded in 1852 during a time when fire insurance was crucial for protecting businesses and homes, The Hanover Insurance Group (NYSE: THG) provides property and casualty insurance products through independent agents, serving individuals, small businesses, and mid-sized companies.
Why Are We Cautious About THG?
- Sales trends were unexciting over the last two years as its 4.9% annual growth was below the typical insurance company
- Sluggish 4.2% annualized growth in net premiums earned over the last two years indicates the firm trailed its insurance peers
- Capital trends were unexciting over the last five years as its 3.7% annual book value per share growth was below the typical insurance firm
The Hanover Insurance Group’s stock price of $191.90 implies a valuation ratio of 1.7x forward P/B. Check out our free in-depth research report to learn more about why THG doesn’t pass our bar.
Stocks We Like More
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