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. Keeping that in mind, here is one small-cap stock that could be the next big thing and two that may have trouble.
Two Small-Cap Stocks to Sell:
Carter's (CRI)
Market Cap: $1.37 billion
Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE: CRI) is an American designer and marketer of children's apparel.
Why Should You Sell CRI?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Low free cash flow margin of 6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Carter’s stock price of $37.12 implies a valuation ratio of 10.6x forward P/E. Check out our free in-depth research report to learn more about why CRI doesn’t pass our bar.
Visteon (VC)
Market Cap: $2.92 billion
Originally spun off from Ford Motor Company in 2000, Visteon (NYSE: VC) designs and manufactures cockpit electronics for vehicles, including digital instrument clusters, displays, infotainment systems, and battery management systems.
Why Are We Hesitant About VC?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.7% annually over the last two years
- Gross margin of 12.1% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Earnings per share have dipped by 28.9% annually over the past two years, which is concerning because stock prices follow EPS over the long term
At $108.74 per share, Visteon trades at 11.6x forward P/E. If you’re considering VC for your portfolio, see our FREE research report to learn more.
One Small-Cap Stock to Watch:
Valmont (VMI)
Market Cap: $9.77 billion
Credited with an invention in the 1950s that improved crop yields, Valmont (NYSE: VMI) provides engineered products and infrastructure services for the agricultural industry.
Why Could VMI Be a Winner?
- Operating profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- Earnings per share have massively outperformed its peers over the last two years, increasing by 57.6% annually
- Free cash flow margin jumped by 10.2 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
Valmont is trading at $503.52 per share, or 2.2x forward price-to-sales. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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