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.
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.
Peloton (PTON)
Market Cap: $2.39 billion
Started as a Kickstarter campaign, Peloton (NASDAQ: PTON) is a fitness technology company known for its at-home exercise equipment and interactive online workout classes.
Why Do We Avoid PTON?
- Number of connected fitness subscribers has disappointed over the past two years, indicating weak demand for its offerings
- Subpar operating margin of 2.5% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Free cash flow margin is projected to show no improvement next year
Peloton’s stock price of $5.48 implies a valuation ratio of 16.1x forward P/E. Dive into our free research report to see why there are better opportunities than PTON.
American Express Global Business Travel (GBTG)
Market Cap: $4.95 billion
Originally spun off from American Express in 2014 but maintaining the Amex GBT brand, Global Business Travel Group (NYSE: GBTG) provides end-to-end business travel and expense management solutions, connecting corporate clients with travel suppliers and offering specialized software services.
Why Does GBTG Give Us Pause?
- Estimated sales growth of 7.8% for the next 12 months implies demand will slow from its two-year trend
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 58.5%, one of the worst among software companies
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 3.8 percentage points
American Express Global Business Travel is trading at $9.48 per share, or 1.4x forward price-to-sales. To fully understand why you should be careful with GBTG, check out our full research report (it’s free).
Black Stone Minerals (BSM)
Market Cap: $3.14 billion
With roots dating to the late 1800s when railroads were expanding westward and land grants were common, Black Stone Minerals (NYSE: BSM) owns oil and natural gas mineral rights across the U.S., earning royalties when energy companies drill on its land.
Why Are We Cautious About BSM?
- Smaller revenue base of $459.5 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Expenses have increased as a percentage of revenue over the last five years as its EBITDA margin fell by 5.9 percentage points
At $14.92 per share, Black Stone Minerals trades at 14.9x forward P/E. If you’re considering BSM for your portfolio, see our FREE research report to learn more.
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