3 Small-Cap Stocks We Steer Clear Of

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.

Flywire (FLYW)

Market Cap: $1.26 billion

Originally created to process international tuition payments for universities, Flywire (NASDAQ:FLYW) is a cross border payments processor and software platform focusing on complex, high-value transactions like education, healthcare and B2B payments.

Why Does FLYW Give Us Pause?

1. High servicing costs result in a relatively inferior gross margin of 62.9% that must be offset through increased usage
2. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
3. Operating losses show it sacrificed profitability while scaling the business

At $12.88 per share, Flywire trades at 2x forward price-to-sales. Check out our free in-depth research report to learn more about why FLYW doesn’t pass our bar.

Lamb Weston (LW)

Market Cap: $7.41 billion

Best known for its Grown in Idaho brand, Lamb Weston (NYSE:LW) produces and distributes potato products such as frozen french fries and mashed potatoes.

Why Do We Think Twice About LW?

1. Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
2. Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 6.2 percentage points
3. Low free cash flow margin of 0.8% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

Lamb Weston’s stock price of $53.77 implies a valuation ratio of 15.4x forward P/E. Read our free research report to see why you should think twice about including LW in your portfolio.

Scorpio Tankers (STNG)

Market Cap: $2.31 billion

Operating one of the youngest fleets in the industry, Scorpio Tankers (NYSE: STNG) is an international provider of marine transportation services, specializing in the shipment of refined petroleum.

Why Does STNG Fall Short?

1. Annual sales declines of 1.5% for the past five years show its products and services struggled to connect with the market during this cycle
2. Demand for its offerings was relatively low as its number of total vessels has underwhelmed
3. Earnings per share have dipped by 41.5% annually over the past two years, which is concerning because stock prices follow EPS over the long term

Scorpio Tankers is trading at $47.97 per share, or 7.9x forward P/E. If you’re considering STNG for your portfolio, see our FREE research report to learn more.

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