3 Small-Cap Stocks with Questionable Fundamentals

Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.

Zumiez (ZUMZ)

Market Cap: $350.6 million

With store associates called “Zumiez Stash Members”, Zumiez (NASDAQ:ZUMZ) is a specialty retailer of street and skate apparel, footwear, and accessories.

Why Do We Pass on ZUMZ?

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. Smaller revenue base of $900.3 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
3. Persistent operating margin losses suggest the business manages its expenses poorly

Zumiez’s stock price of $20.45 implies a valuation ratio of 39.3x forward P/E. If you’re considering ZUMZ for your portfolio, see our FREE research report to learn more.

CarMax (KMX)

Market Cap: $6.3 billion

Known for its transparent, customer-centric approach and wide selection of vehicles, Carmax (NYSE:KMX) is the largest automotive retailer in the United States.

Why Do We Think KMX Will Underperform?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Widely-available products (and therefore stiff competition) result in an inferior gross margin of 10.9% that must be offset through higher volumes
3. High net-debt-to-EBITDA ratio of 16× could force the company to raise capital at unfavorable terms if market conditions deteriorate

At $43.08 per share, CarMax trades at 12.3x forward P/E. Check out our free in-depth research report to learn more about why KMX doesn’t pass our bar.

ICU Medical (ICUI)

Market Cap: $2.92 billion

Founded in 1984 and named for its initial focus on intensive care units, ICU Medical (NASDAQ:ICUI) develops and manufactures medical products for infusion therapy, vascular access, and vital care applications used in hospitals and other healthcare settings.

Why Are We Out on ICUI?

1. Sales trends were unexciting over the last two years as its 1.7% annual growth was below the typical healthcare company
2. Forecasted revenue decline of 10.6% for the upcoming 12 months implies demand will fall off a cliff
3. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 19.1% annually

ICU Medical is trading at $118.46 per share, or 17.1x forward P/E. To fully understand why you should be careful with ICUI, check out our full research report (it’s free for active Edge members).

Stocks We Like More

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