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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Westamerica Bancorporation (WABC)
Market Cap: $1.3 billion
Founded in 1884 and serving communities from Mendocino County in the north to Kern County in the south, Westamerica Bancorporation (NASDAQ: WABC) provides banking services to individuals and small businesses throughout Northern and Central California.
Why Do We Avoid WABC?
- Muted 5.2% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Net interest margin dropped by 56.9 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 12.9% annually, worse than its revenue
Westamerica Bancorporation is trading at $55.39 per share, or 1.4x forward P/B. Check out our free in-depth research report to learn more about why WABC doesn’t pass our bar.
Old National Bank (ONB)
Market Cap: $9.25 billion
Tracing its roots back to 1834 when Andrew Jackson was president, Old National Bancorp (NASDAQ: ONB) is a bank holding company that provides commercial and consumer loans, deposit services, wealth management, and treasury solutions primarily throughout the Midwest region.
Why Do We Think Twice About ONB?
- Inferior net interest margin of 3.5% means it must compensate for lower profitability through increased loan originations
- Performance over the past five years shows its incremental sales were less profitable, as its 5.8% annual earnings per share growth trailed its revenue gains
- Annual tangible book value per share growth of 4% over the last five years was below our standards for the banking sector
Old National Bank’s stock price of $23.93 implies a valuation ratio of 1x forward P/B. To fully understand why you should be careful with ONB, check out our full research report (it’s free).
Merchants Bancorp (MBIN)
Market Cap: $2.11 billion
With a strategic focus on low-risk, government-backed lending programs, Merchants Bancorp (NASDAQCM:MBIN) is an Indiana-based bank holding company specializing in multi-family mortgage banking, mortgage warehousing, and traditional banking services.
Why Are We Cautious About MBIN?
- Muted 7.4% annual revenue growth over the last two years shows its demand lagged behind its banking peers
- Operational productivity has decreased over the last five years as its efficiency ratio worsened by 18.3 percentage points
- Tier one capital ratio of 9.3% raises concerns about the firm’s ability to maintain adequate liquidity
At $45.99 per share, Merchants Bancorp trades at 1x forward P/B. Read our free research report to see why you should think twice about including MBIN in your portfolio.
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