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.
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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Enphase (ENPH)
Market Cap: $4.14 billion
The first company to successfully commercialize the solar micro-inverter, Enphase (NASDAQ: ENPH) manufactures software-driven home energy products.
Why Do We Steer Clear of ENPH?
- Declining unit sales over the past two years imply it may need to invest in improvements to get back on track
- Free cash flow margin shrank by 15.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital imply its previous profit engines are losing steam
Enphase’s stock price of $31.27 implies a valuation ratio of 16.6x forward P/E. Dive into our free research report to see why there are better opportunities than ENPH.
National Bank Holdings (NBHC)
Market Cap: $1.74 billion
Operating under familiar local brands like Community Banks of Colorado, Bank Midwest, and Bank of Jackson Hole, National Bank Holdings (NYSE: NBHC) operates regional banks across Colorado, Kansas, Missouri, Wyoming, Texas, and other western states, offering commercial, business, and consumer banking services.
Why Do We Avoid NBHC?
- Muted 6.1% annual revenue growth over the last two years shows its demand lagged behind its banking peers
- Earnings per share fell by 2.5% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Capital trends were unexciting over the last five years as its 1.8% annual tangible book value per share growth was below the typical banking firm
National Bank Holdings is trading at $38.96 per share, or 1x forward P/B. Read our free research report to see why you should think twice about including NBHC in your portfolio.
BKV (BKV)
Market Cap: $2.26 billion
Operating a "closed-loop" model linking gas production to carbon capture, BKV (NYSE: BKV) produces natural gas from shale formations in Texas and Pennsylvania, selling it to utilities, industrial users, and exporters.
Why Do We Think BKV Will Underperform?
- Modest revenue base of $1.51 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 18.8 percentage points
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
At $20.69 per share, BKV trades at 13.6x forward P/E. To fully understand why you should be careful with BKV, check out our full research report (it’s free).
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