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.
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.
Sirius XM (SIRI)
Market Cap: $9.29 billion
Known for its commercial-free music channels, Sirius XM (NASDAQ: SIRI) is a broadcasting company that provides satellite radio and online radio services across North America.
Why Are We Out on SIRI?
- Muted 1% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Free cash flow margin is expected to remain in place over the coming year
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Sirius XM is trading at $29.13 per share, or 9.1x forward P/E. Read our free research report to see why you should think twice about including SIRI in your portfolio.
Omnicell (OMCL)
Market Cap: $1.72 billion
Driven by the vision of an "Autonomous Pharmacy" with zero medication errors, Omnicell (NASDAQ: OMCL) provides medication management automation and adherence tools that help healthcare systems and pharmacies reduce errors and improve efficiency.
Why Should You Sell OMCL?
- Muted 5.4% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 6.8% annually
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
At $40.91 per share, Omnicell trades at 21.5x forward P/E. Dive into our free research report to see why there are better opportunities than OMCL.
NOV (NOV)
Market Cap: $7.58 billion
With roots stretching back to 1862 when it began making equipment for early oil fields, NOV (NYSE: NOV) manufactures drilling rigs, drill bits, pumps, and other equipment used to drill oil and gas wells.
Why Do We Think NOV Will Underperform?
- Sales tumbled by 3.3% annually over the last ten years, showing market trends are working against it during this cycle
- Gross margin of 20.3% reflects its high production costs and unfavorable asset base
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
NOV’s stock price of $18.65 implies a valuation ratio of 18.5x forward P/E. To fully understand why you should be careful with NOV, check out our full research report (it’s free).
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