Kayode Omotosho
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. That said, here is one small-cap stock that could amplify your portfolio’s returns and two that could be down big.
Two Small-Cap Stocks to Sell:
Marqeta (MQ)
Market Cap: $1.95 billion
Powering the cards behind innovative fintech services like Block’s Cash App, Marqeta (NASDAQ:MQ) provides a cloud-based platform that allows businesses to create customized payment card programs and process card transactions.
Why Are We Hesitant About MQ?
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Annual revenue growth of 11% over the last five years was below our standards for the software sector
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Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
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Projected 8.9 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
At $18.68 per share, Marqeta trades at 2.7x forward price-to-sales. If you’re considering MQ for your portfolio, see our FREE research report to learn more.
Frontdoor (FTDR)
Market Cap: $5.5 billion
Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor (NASDAQ:FTDR) is a provider of home warranty and service plans.
Why Are We Bearish on FTDR?
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Muted 6.7% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
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Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 1.8 percentage points
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Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Frontdoor is trading at $79.84 per share, or 16.3x forward P/E. Dive into our free research report to see why there are better opportunities than FTDR.
One Small-Cap Stock to Watch:
DHT Holdings (DHT)
Market Cap: $3.71 billion
With each vessel capable of carrying roughly 2 million barrels of oil—enough to fill about 125 Olympic swimming pools—DHT Holdings (NYSE:DHT) operates very large crude carriers that transport crude oil across international routes for energy companies and traders.
Why Could DHT Be a Winner?
