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.

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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.

Bath and Body Works (BBWI)

Market Cap: $6.03 billion

Spun off from L Brands in 2020, Bath & Body Works (NYSE:BBWI) is a personal care and home fragrance retailer where consumers can find specialty shower gels, scented candles for the home, and lotions.

Why Are We Cautious About BBWI?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
2. Estimated sales growth of 2.1% for the next 12 months implies demand will slow from its six-year trend
3. Earnings per share lagged its peers over the last six years as they only grew by 8.6% annually

Bath and Body Works is trading at $28.77 per share, or 7.8x forward P/E. Read our free research report to see why you should think twice about including BBWI in your portfolio.

B&G Foods (BGS)

Market Cap: $325.6 million

Started as a small grocery store in New York City, B&G Foods (NYSE:BGS) is an American packaged foods company with a diverse portfolio of more than 50 brands.

Why Do We Avoid BGS?

1. Sales tumbled by 3.9% annually over the last three years, showing consumer trends are working against its favor
2. Sales were less profitable over the last three years as its earnings per share fell by 27.2% annually, worse than its revenue declines
3. 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

B&G Foods’s stock price of $4.08 implies a valuation ratio of 6.8x forward P/E. Check out our free in-depth research report to learn more about why BGS doesn’t pass our bar.

Donaldson (DCI)

Market Cap: $8.40 billion

Playing a vital role in the historic Apollo 11 mission, Donaldson (NYSE:DCI) manufacturers and sells filtration equipment for various industries.

Why Does DCI Fall Short?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Projected sales growth of 2.9% for the next 12 months suggests sluggish demand
3. Free cash flow margin shrank by 5.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

At $72.11 per share, Donaldson trades at 48.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than DCI.

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