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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Paycom (PAYC)
Market Cap: $7.05 billion
Pioneering the concept of employees doing their own payroll with its "Beti" technology, Paycom (NYSE: PAYC) provides cloud-based human capital management software that helps businesses manage the entire employment lifecycle from recruitment to retirement.
Why Does PAYC Worry Us?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 9% underwhelmed
- Estimated sales growth of 6.6% for the next 12 months implies demand will slow from its two-year trend
- Static operating margin over the last year shows it couldn’t become more efficient
Paycom is trading at $151.87 per share, or 3.3x forward price-to-sales. To fully understand why you should be careful with PAYC, check out our full research report (it’s free).
nLIGHT (LASR)
Market Cap: $3.82 billion
Founded by a former CEO and Harvard-educated entrepreneur Scott Keeneyn, nLIGHT (NASDAQ: LASR) offers semiconductor and fiber lasers to the industrial, aerospace & defense, and medical sectors.
Why Are We Wary of LASR?
- Annual revenue growth of 3.8% over the last five years was below our standards for the industrials sector
- Historical operating margin losses point to an inefficient cost structure
- Cash-burning history makes us doubt the long-term viability of its business model
At $67.39 per share, nLIGHT trades at 149.7x forward P/E. Dive into our free research report to see why there are better opportunities than LASR.
Liberty Energy (LBRT)
Market Cap: $2.75 billion
Operating approximately 40 active fleets across North America's most productive shale basins, Liberty Energy (NYSE: LBRT) provides hydraulic fracturing services that help oil and gas companies extract resources from shale formations.
Why Is LBRT Not Exciting?
- Gross margin of 23.3% reflects its high production costs and unfavorable asset base
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Liberty Energy’s stock price of $16.92 implies a valuation ratio of 53.4x forward P/E. If you’re considering LBRT for your portfolio, see our FREE research report to learn more.
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