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.
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.
Laureate Education (LAUR)
Market Cap: $4.88 billion
Founded in 1998 by Douglas L. Becker and based in Miami, Laureate Education (NASDAQ: LAUR) is a global network of higher education institutions.
Why Should You Dump LAUR?
- Muted 10.7% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 14% annually while its revenue grew
- Free cash flow margin is expected to remain in place over the coming year
At $35.25 per share, Laureate Education trades at 15.8x forward P/E. Dive into our free research report to see why there are better opportunities than LAUR.
Sunrun (RUN)
Market Cap: $3.10 billion
Helping homeowners use solar energy to power their homes, Sunrun (NASDAQ: RUN) provides residential solar electricity, specializing in panel installation and leasing services.
Why Is RUN Not Exciting?
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Negative free cash flow raises questions about the return timeline for its investments
Sunrun is trading at $13.26 per share, or 36.7x forward P/E. Read our free research report to see why you should think twice about including RUN in your portfolio.
Enact Holdings (ACT)
Market Cap: $5.90 billion
Playing a critical role in helping first-time homebuyers access the housing market, Enact Holdings (NASDAQ: ACT) provides private mortgage insurance that enables lenders to offer home loans with lower down payments while protecting against borrower defaults.
Why Are We Hesitant About ACT?
- Net premiums earned plateaued over the last five years, signaling weak incremental demand for its insurance policies
- Estimated sales growth of 1.6% for the next 12 months implies demand will slow from its two-year trend
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 4.9% annually
Enact Holdings’s stock price of $41.78 implies a valuation ratio of 1x forward P/B. To fully understand why you should be careful with ACT, check out our full research report (it’s free).
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