Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.
Genesco (GCO)
Market Cap: $381.5 million
Spanning a broad range of styles, brands, and prices, Genesco (NYSE:GCO) sells footwear, apparel, and accessories through multiple brands and banners.
Why Do We Steer Clear of GCO?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $34.35 per share, Genesco trades at 12.9x forward P/E. If you’re considering GCO for your portfolio, see our FREE research report to learn more.
Mayville Engineering (MEC)
Market Cap: $901.8 million
Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE:MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.
Why Does MEC Fall Short?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.3% annually over the last two years
- Earnings per share have dipped by 42.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Mayville Engineering is trading at $34.51 per share, or 60.6x forward P/E. Check out our free in-depth research report to learn more about why MEC doesn’t pass our bar.
Universal Health Services (UHS)
Market Cap: $8.73 billion
With a network spanning 39 states and three countries, Universal Health Services (NYSE:UHS) operates acute care hospitals and behavioral health facilities across the United States, United Kingdom, and Puerto Rico.
Why Is UHS Not Exciting?
- Disappointing comparable store sales over the past two years show customers aren’t responding well to its offerings and value proposition
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Universal Health Services’s stock price of $145.54 implies a valuation ratio of 6.4x forward P/E. Read our free research report to see why you should think twice about including UHS in your portfolio.
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