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.
The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Flowers Foods (FLO)
Market Cap: $1.37 billion
With Wonder Bread as its premier brand, Flowers Foods (NYSE: FLO) is a packaged foods company that focuses on bakery products such as breads, buns, and cakes.
Why Are We Bearish on FLO?
- Declining unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Sales are projected to tank by 3.1% over the next 12 months as demand evaporates
- Earnings per share fell by 24.3% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
Flowers Foods is trading at $6.48 per share, or 9.6x forward P/E. Read our free research report to see why you should think twice about including FLO in your portfolio.
Shoals (SHLS)
Market Cap: $1.18 billion
Started in Huntsville, Alabama, Shoals (NASDAQ: SHLS) designs and manufactures products that make solar energy systems work more efficiently.
Why Does SHLS Worry Us?
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 8.5% annually
- 8.3 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Shoals’s stock price of $7.07 implies a valuation ratio of 12.8x forward P/E. To fully understand why you should be careful with SHLS, check out our full research report (it’s free).
FB Financial (FBK)
Market Cap: $2.85 billion
Founded in 1906 and operating through more than a century of economic cycles, FB Financial (NYSE: FBK) operates FirstBank, providing commercial and consumer banking services across Tennessee, Kentucky, Alabama, and North Georgia.
Why Does FBK Give Us Pause?
- Annual revenue growth of 2.6% over the last five years was below our standards for the banking sector
- Estimated net interest income growth of 5% for the next 12 months implies demand will slow from its five-year trend
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
At $57 per share, FB Financial trades at 1.4x forward P/B. Read our free research report to see why you should think twice about including FBK in your portfolio.
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