3 Small-Cap Stocks with Open Questions

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.

The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.

Bright Horizons (BFAM)

Market Cap: $6.21 billion

Founded in 1986, Bright Horizons (NYSE:BFAM) is a global provider of child care, early education, and workforce support solutions.

Why Are We Out on BFAM?

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. Estimated sales growth of 7.6% for the next 12 months implies demand will slow from its two-year trend
3. ROIC of 4.7% reflects management’s challenges in identifying attractive investment opportunities

Bright Horizons is trading at $110.19 per share, or 25.1x forward P/E. Check out our free in-depth research report to learn more about why BFAM doesn’t pass our bar.

Xponential Fitness (XPOF)

Market Cap: $285.3 million

Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE:XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.

Why Do We Steer Clear of XPOF?

1. 5.8% annual revenue growth over the last two years was slower than its consumer discretionary peers
2. Suboptimal cost structure is highlighted by its history of operating margin losses
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $8.14 per share, Xponential Fitness trades at 5.4x forward P/E. If you’re considering XPOF for your portfolio, see our FREE research report to learn more.

MillerKnoll (MLKN)

Market Cap: $1.37 billion

Created through the 2021 merger of industry icons Herman Miller and Knoll, MillerKnoll (NASDAQ:MLKN) designs, manufactures, and distributes interior furnishings for offices, healthcare facilities, educational settings, and homes worldwide.

Why Do We Avoid MLKN?

1. Sales tumbled by 5.2% annually over the last two years, showing market trends are working against its favor during this cycle
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.4 percentage points
3. 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

MillerKnoll’s stock price of $20.42 implies a valuation ratio of 10.3x forward P/E. Dive into our free research report to see why there are better opportunities than MLKN.

Stocks We Like More

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