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.
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.
Dropbox (DBX)
Market Cap: $7.14 billion
Originally named after the founders' tendency to "drop" files into a shared folder, Dropbox (NASDAQ:DBX) provides a content collaboration platform that helps individuals and teams store, organize, share, and work on files from anywhere.
Why Are We Out on DBX?
- Billings didn’t grow over the last year, suggesting the company struggled to sell its software and might have to lower prices to stimulate growth
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Operating margin expansion of 6.1 percentage points over the last year shows the company optimized its expenses
At $30.25 per share, Dropbox trades at 2.9x forward price-to-sales. Check out our free in-depth research report to learn more about why DBX doesn’t pass our bar.
Atkore (ATKR)
Market Cap: $2.48 billion
Protecting the things that power our world, Atkore (NYSE:ATKR) designs and manufactures electrical safety products.
Why Do We Avoid ATKR?
- Sales tumbled by 7.8% annually over the last two years, showing market trends are working against it during this cycle
- Free cash flow margin shrank by 9.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital imply its previous profit engines are losing steam
Atkore’s stock price of $73.42 implies a valuation ratio of 13.2x forward P/E. If you’re considering ATKR for your portfolio, see our FREE research report to learn more.
Franklin BSP Realty Trust (FBRT)
Market Cap: $628 million
Operating as a specialized real estate investment trust (REIT) with roots dating back to 2012, Franklin BSP Realty Trust (NYSE:FBRT) originates and manages a diversified portfolio of commercial real estate debt investments secured by properties in the United States and abroad.
Why Do We Pass on FBRT?
- Net interest income stagnated over the last five years and signals the need for new growth strategies
- Forecasted net interest income decline of 3.4% for the upcoming 12 months implies demand will fall off a cliff
- Earnings per share have contracted by 7.5% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Franklin BSP Realty Trust is trading at $8.15 per share, or 0.6x forward P/B. Read our free research report to see why you should think twice about including FBRT in your portfolio.
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