Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.
The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here is one small-cap stock that could be the next big thing and two that may have trouble.
Two Small-Cap Stocks to Sell:
Tilly's (TLYS)
Market Cap: $130.2 million
With an emphasis on skate and surf culture, Tilly’s (NYSE: TLYS) is a specialty retailer that sells clothing, footwear, and accessories geared towards fashion-forward teens and young adults.
Why Do We Pass on TLYS?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Earnings per share have dipped by 55.2% annually over the past three years, which is concerning because stock prices follow EPS over the long term
- Unprofitable operations could lead to additional rounds of dilutive equity financing if the credit window closes
Tilly's is trading at $4.28 per share, or 99.5x forward EV-to-EBITDA. To fully understand why you should be careful with TLYS, check out our full research report (it’s free).
PENN Entertainment (PENN)
Market Cap: $2.19 billion
Established in 1982, PENN Entertainment (NASDAQ: PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.
Why Do We Think PENN Will Underperform?
- Muted 13.6% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Negative free cash flow raises questions about the return timeline for its investments
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
PENN Entertainment’s stock price of $17.02 implies a valuation ratio of 2.3x forward EV-to-EBITDA. If you’re considering PENN for your portfolio, see our FREE research report to learn more.
One Small-Cap Stock to Watch:
Verra Mobility (VRRM)
Market Cap: $2.30 billion
Aiming to wrap technology and data around a historically manual and paper-based industry, Verra Mobility (NASDAQ: VRRM) is a leading provider of smart mobility technology to address tolls and violations, title and registration services, as well as safety and traffic enforcement.
Why Do We Like VRRM?
- Impressive 20% annual revenue growth over the last five years indicates it’s winning market share this cycle
- Offerings are difficult to replicate at scale and result in a best-in-class gross margin of 61.3%
- Earnings per share grew by 19.6% annually over the last five years and trumped its peers
At $15.12 per share, Verra Mobility trades at 11.2x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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