Radek Strnad
3 min read
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.
ZoomInfo (GTM)
Market Cap: $1.25 billion
Operating a platform it calls “RevOS” – short for Revenue Operating System – ZoomInfo (NASDAQ:GTM) provides sales, marketing, and recruiting teams with business intelligence and analytics to identify prospects and deliver targeted outreach.
Why Do We Pass on GTM?
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Offerings struggled to generate interest as its billings were flat over the last year
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Projected sales decline of 6.2% for the next 12 months points to a tough demand environment ahead
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Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 49.7 percentage points
At $4.31 per share, ZoomInfo trades at 1.1x forward price-to-sales. To fully understand why you should be careful with GTM, check out our full research report (it’s free).
Methode Electronics (MEI)
Market Cap: $451.3 million
Founded in 1946, Methode Electronics (NYSE:MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Why Should You Sell MEI?
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Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.5% annually over the last five years
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Free cash flow margin dropped by 7.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
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Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Methode Electronics’s stock price of $12.66 implies a valuation ratio of 9x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why MEI doesn’t pass our bar.
Novavax (NVAX)
Market Cap: $1.82 billion
Pioneering a nanoparticle technology that mimics the molecular structure of disease pathogens, Novavax (NASDAQ:NVAX) develops and commercializes protein-based vaccines for infectious diseases, with a primary focus on its COVID-19 vaccine and combination respiratory vaccine candidates.
