Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
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.
1-800-FLOWERS (FLWS)
Market Cap: $222.2 million
Founded in 1976, 1-800-FLOWERS (NASDAQ: FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.
Why Do We Avoid FLWS?
- Products and services aren't resonating with the market as its revenue declined by 8.5% annually over the last two years
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
1-800-FLOWERS’s stock price of $3.35 implies a valuation ratio of 4.4x forward EV-to-EBITDA. To fully understand why you should be careful with FLWS, check out our full research report (it’s free for active Edge members).
MRC Global (MRC)
Market Cap: $1.17 billion
Producing bomb casings and tracks for vehicles during WWII, MRC (NYSE: MRC) offers pipes, valves, and fitting products for various industries.
Why Are We Out on MRC?
- Annual sales declines of 9.9% for the past two years show its products and services struggled to connect with the market during this cycle
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 1.6% declines over the past two years
- Earnings per share have contracted by 74% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
At $13.78 per share, MRC Global trades at 0.4x forward price-to-sales. Check out our free in-depth research report to learn more about why MRC doesn’t pass our bar.
STAAR Surgical (STAA)
Market Cap: $1.32 billion
With over 2.5 million implants performed worldwide, STAAR Surgical (NASDAQ: STAA) designs and manufactures implantable lenses that correct vision problems without removing the eye's natural lens.
Why Do We Pass on STAA?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 37.3 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
STAAR Surgical is trading at $26.55 per share, or 60.1x forward P/E. Dive into our free research report to see why there are better opportunities than STAA.
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