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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
CNO Financial Group (CNO)
Market Cap: $4.29 billion
Rebranded from Conseco in 2010 to signal a fresh start after navigating financial challenges, CNO Financial Group (NYSE: CNO) develops and markets health insurance, annuities, and life insurance products primarily targeting middle-income pre-retirees and retirees.
Why Do We Avoid CNO?
- Net premiums earned expanded by 1% annually over the last five years, falling below our expectations for the insurance sector
- Day-to-day expenses have swelled relative to revenue over the last five years as its pre-tax profit margin fell by 8.9 percentage points
- Annual book value per share declines of 6.2% for the past five years show its capital management struggled during this cycle
CNO Financial Group’s stock price of $45.62 implies a valuation ratio of 1.6x forward P/B. To fully understand why you should be careful with CNO, check out our full research report (it’s free).
Selective Insurance Group (SIGI)
Market Cap: $5.18 billion
Founded in 1926 during the early days of automobile insurance, Selective Insurance Group (NASDAQ: SIGI) is a property and casualty insurance company that sells commercial, personal, and excess and surplus lines insurance products through independent agents.
Why Are We Wary of SIGI?
- Estimated sales growth of 1.7% for the next 12 months implies demand will slow from its two-year trend
- Expenses have increased as a percentage of revenue over the last five years as its pre-tax profit margin fell by 3.2 percentage points
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 12.6% annually
Selective Insurance Group is trading at $86.49 per share, or 1.4x forward P/B. If you’re considering SIGI for your portfolio, see our FREE research report to learn more.
Hope Bancorp (HOPE)
Market Cap: $1.60 billion
With roots in serving Korean-American communities and now expanded to a multi-ethnic clientele across 12 states, Hope Bancorp (NASDAQ: HOPE) operates Bank of Hope, providing commercial and retail banking services with a focus on serving multi-ethnic communities across the United States.
Why Do We Steer Clear of HOPE?
- Net interest income trends were unexciting over the last five years as its 1% annual growth was below the typical banking firm
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 2.2% annually while its revenue grew
- Products and services are facing profitability challenges during this cycle, as seen in its flat tangible book value per share over the last two years
At $12.52 per share, Hope Bancorp trades at 0.7x forward P/B. To fully understand why you should be careful with HOPE, check out our full research report (it’s free).
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