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.
Brinker International (EAT)
Market Cap: $6.36 billion
Founded by Norman Brinker in Dallas, Brinker International (NYSE:EAT) is a casual restaurant chain that operates the Chili’s, Maggiano’s Little Italy, and It’s Just Wings banners.
Why Does EAT Give Us Pause?
- Slow expansion of restaurants indicates a strategic shift toward maximizing returns from existing locations
- Lacking pricing power results in an inferior gross margin of 15.1% that must be offset by turning more tables
- Poor expense management has led to an operating margin of 6.2% that is below the industry average
Brinker International’s stock price of $143.46 implies a valuation ratio of 20.7x forward price-to-earnings. To fully understand why you should be careful with EAT, check out our full research report (it’s free).
RE/MAX (RMAX)
Market Cap: $163.4 million
Short for Real Estate Maximums, RE/MAX (NYSE:RMAX) operates a real estate franchise network spanning over 100 countries and territories.
Why Are We Out on RMAX?
- Number of agents has disappointed over the past two years, indicating weak demand for its offerings
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 10.2% annually while its revenue grew
- Free cash flow margin is forecasted to shrink by 13.3 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
RE/MAX is trading at $8.53 per share, or 6.6x forward price-to-earnings. Read our free research report to see why you should think twice about including RMAX in your portfolio.
UFP Technologies (UFPT)
Market Cap: $1.65 billion
Founded in 1963, UFP Technologies (NASDAQ:UFPT) designs and manufactures medical products, sterile packaging, and other highly-engineered custom products for healthcare settings.
Why Is UFPT Not Exciting?
- Subscale operations are evident in its revenue base of $504.4 million, meaning it has fewer distribution channels than its larger rivals
- Free cash flow margin was stuck in limbo over the last five years
At $207.62 per share, UFP Technologies trades at 3.3x trailing 12-month price-to-sales. Check out our free in-depth research report to learn more about why UFPT doesn’t pass our bar.
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