Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.
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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Oxford Industries (OXM)
Market Cap: $532.2 million
The parent company of Tommy Bahama, Oxford Industries (NYSE: OXM) is a lifestyle fashion conglomerate with brands that embody outdoor happiness.
Why Are We Out on OXM?
- Sales trends were unexciting over the last five years as its 12.6% annual growth was below the typical consumer discretionary company
- Poor free cash flow margin of 3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Oxford Industries is trading at $35.87 per share, or 15x forward P/E. Check out our free in-depth research report to learn more about why OXM doesn’t pass our bar.
Farmer Mac (AGM)
Market Cap: $1.58 billion
Created by Congress in 1987 to build a bridge between Wall Street and rural America, Farmer Mac (NYSE: AGM) provides a secondary market for agricultural and rural loans, helping lenders increase their liquidity and lending capacity to serve rural America.
Why Is AGM Not Exciting?
- Annual revenue growth of 3.7% over the last two years was below our standards for the financials sector
- Earnings per share lagged its peers over the last two years as they only grew by 3.3% annually
- Debt-to-equity ratio of 19.8× is concerningly high, indicating excessive leverage that could limit financial flexibility
At $147.57 per share, Farmer Mac trades at 7.8x forward P/E. Read our free research report to see why you should think twice about including AGM in your portfolio.
Atlanticus Holdings (ATLC)
Market Cap: $803.6 million
Using data analytics to serve the millions of Americans with less-than-perfect credit scores, Atlanticus Holdings (NASDAQ: ATLC) provides technology and services that help lenders offer credit products to consumers often overlooked by traditional financing providers.
Why Does ATLC Worry Us?
- Earnings per share have contracted by 5.7% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
Atlanticus Holdings’s stock price of $54.65 implies a valuation ratio of 5.9x forward P/E. Check out our free in-depth research report to learn more about why ATLC doesn’t pass our bar.
Stocks We Like More
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