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.
Latham (SWIM)
Market Cap: $844 million
Started as a family business, Latham (NASDAQ: SWIM) is a global designer and manufacturer of in-ground residential swimming pools and related products.
Why Are We Wary of SWIM?
- Annual revenue declines of 14.5% over the last two years indicate problems with its market positioning
- Earnings per share fell by 21.4% annually over the last four years while its revenue grew, showing its incremental sales were much less profitable
- Negative returns on capital show management lost money while trying to expand the business
Latham’s stock price of $6.98 implies a valuation ratio of 67.4x forward price-to-earnings. If you’re considering SWIM for your portfolio, see our FREE research report to learn more.
Columbus McKinnon (CMCO)
Market Cap: $524.8 million
With 19 different brands across the globe, Columbus McKinnon (NASDAQ: CMCO) offers material handling equipment for the construction, manufacturing, and transportation industries.
Why Are We Out on CMCO?
- Muted 2.4% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 1.8% annually
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 12.8 percentage points
Columbus McKinnon is trading at $18.30 per share, or 5.7x forward price-to-earnings. Check out our free in-depth research report to learn more about why CMCO doesn’t pass our bar.
Orion (ORN)
Market Cap: $216.8 million
Established in 1994, Orion (NYSE: ORN) provides construction services for marine infrastructure and industrial projects.
Why Does ORN Fall Short?
- 2.4% annual revenue growth over the last five years was slower than its industrials peers
- Gross margin of 9.2% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Substandard operating profitability and its deterioration over the last five years limit its responsiveness to unforeseen market trends
At $5.56 per share, Orion trades at 17.4x forward price-to-earnings. To fully understand why you should be careful with ORN, check out our full research report (it’s free).
Stocks We Like More
The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.
Take advantage of the rebound by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.
