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.
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 are three small-cap stocks to avoid and some other investments you should consider instead.
Kennametal (KMT)
Market Cap: $1.60 billion
Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE: KMT) is a provider of industrial materials and tools for various sectors.
Why Do We Think KMT Will Underperform?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Estimated sales growth of 1.4% for the next 12 months is soft and implies weaker demand
- Earnings per share have dipped by 5.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
At $21.08 per share, Kennametal trades at 14.4x forward P/E. Dive into our free research report to see why there are better opportunities than KMT.
Enphase (ENPH)
Market Cap: $4.88 billion
The first company to successfully commercialize the solar micro-inverter, Enphase (NASDAQ: ENPH) manufactures software-driven home energy products.
Why Does ENPH Give Us Pause?
- Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Efficiency has decreased over the last five years as its operating margin fell by 12 percentage points
- Earnings per share have dipped by 27.3% annually over the past two years, which is concerning because stock prices follow EPS over the long term
Enphase is trading at $37.59 per share, or 15x forward P/E. If you’re considering ENPH for your portfolio, see our FREE research report to learn more.
Northwest Bancshares (NWBI)
Market Cap: $1.86 billion
Founded in 1896 and operating across Pennsylvania, New York, Ohio, and Indiana, Northwest Bancshares (NASDAQ: NWBI) is a bank holding company that operates Northwest Bank, providing personal and business banking, investment management, and trust services.
Why Are We Cautious About NWBI?
- 5.9% annual net interest income growth over the last five years was slower than its banking peers
- Capital trends were unexciting over the last five years as its 2.3% annual tangible book value per share growth was below the typical banking firm
- Estimated tangible book value per share decline of 4.2% for the next 12 months implies a challenging profitability environment
Northwest Bancshares’s stock price of $12.70 implies a valuation ratio of 1x forward P/B. To fully understand why you should be careful with NWBI, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
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