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.
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 avoid and some other investments you should consider instead.
Parsons (PSN)
Market Cap: $5.44 billion
Delivering aerospace technology during the Cold War-era, Parsons (NYSE:PSN) offers engineering, construction, and cybersecurity solutions for the infrastructure and defense sectors.
Why Are We Hesitant About PSN?
- Sales trends were unexciting over the last two years as its 4.2% annual growth was below the typical industrials company
- Backlog failed to grow over the past two years, suggesting the company may need to tweak its product roadmap and go-to-market strategy
- ROIC of 7% reflects management’s challenges in identifying attractive investment opportunities
Parsons is trading at $50.44 per share, or 15.1x forward P/E. If you’re considering PSN for your portfolio, see our FREE research report to learn more.
Vestis (VSTS)
Market Cap: $1.28 billion
Operating a network of more than 350 facilities with 3,300 delivery routes serving customers weekly, Vestis (NYSE:VSTS) provides uniform rentals, workplace supplies, and facility services to over 300,000 business locations across the United States and Canada.
Why Do We Steer Clear of VSTS?
- Annual sales declines of 2.6% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have contracted by 32.7% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Vestis’s stock price of $9.72 implies a valuation ratio of 23x forward P/E. Dive into our free research report to see why there are better opportunities than VSTS.
RPC (RES)
Market Cap: $1.66 billion
Operating primarily in the Permian Basin with 10 hydraulic fracturing fleets, RPC (NYSE:RES) provides specialized services and equipment like hydraulic fracturing, coiled tubing, and cementing to help oil and gas companies complete and maintain wells.
Why Are We Cautious About RES?
- Smaller revenue base of $1.63 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 28.3%
- Poor free cash flow margin of 6.1% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $7.63 per share, RPC trades at 37.8x forward P/E. Check out our free in-depth research report to learn more about why RES doesn’t pass our bar.
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