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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Coursera (COUR)
Market Cap: $994.1 million
Founded by two Stanford University computer science professors, Coursera (NYSE: COUR) is an online learning platform that offers courses, specializations, and degrees from top universities and organizations around the world.
Why Are We Hesitant About COUR?
- Estimated sales growth of 7.2% for the next 12 months implies demand will slow from its three-year trend
- Gross margin of 54.1% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Excessive marketing spend signals little organic demand and traction for its platform
At $5.88 per share, Coursera trades at 2.8x forward EV/EBITDA. Read our free research report to see why you should think twice about including COUR in your portfolio.
Cal-Maine (CALM)
Market Cap: $3.7 billion
Known for brands such as Egg-Land’s Best and Land O’ Lakes, Cal-Maine (NASDAQ: CALM) produces, packages, and distributes eggs.
Why Does CALM Give Us Pause?
- Sales trends were unexciting over the last three years as its 4.3% annual growth was below the typical consumer staples company
- Sales are projected to tank by 20.2% over the next 12 months as demand evaporates
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 8.1 percentage points
Cal-Maine’s stock price of $77.99 implies a valuation ratio of 23.1x forward P/E. Dive into our free research report to see why there are better opportunities than CALM.
Methode Electronics (MEI)
Market Cap: $207.3 million
Founded in 1946, Methode Electronics (NYSE: MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Why Do We Think MEI Will Underperform?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Methode Electronics is trading at $5.96 per share, or 6.3x forward EV-to-EBITDA. If you’re considering MEI for your portfolio, see our FREE research report to learn more.
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