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 swipe left on and some alternatives you should look into instead.
Shake Shack (SHAK)
Market Cap: $2.35 billion
Started as a hot dog cart in New York City's Madison Square Park, Shake Shack (NYSE: SHAK) is a fast-food restaurant known for its burgers and milkshakes.
Why Are We Cautious About SHAK?
- Operating margin of 2.3% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2% for the last two years
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Shake Shack’s stock price of $54.16 implies a valuation ratio of 45.2x forward P/E. Check out our free in-depth research report to learn more about why SHAK doesn’t pass our bar.
Movado (MOV)
Market Cap: $616.8 million
With its watches displayed in 20 museums around the world, Movado (NYSE: MOV) is a watchmaking company with a portfolio of watch brands and accessories.
Why Is MOV Risky?
- Muted 3.6% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Low free cash flow margin of 5.2% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $36.73 per share, Movado trades at 12x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including MOV in your portfolio.
Scholastic (SCHL)
Market Cap: $936.9 million
Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ: SCHL) is an international company specializing in children's publishing, education, and media services.
Why Should You Sell SCHL?
- Lackluster 6.4% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Scholastic is trading at $45.38 per share, or 22.6x forward P/E. Dive into our free research report to see why there are better opportunities than SCHL.
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