3 Small-Cap Stocks We're Skeptical Of

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 avoid and some other investments you should consider instead.

Middleby (MIDD)

Market Cap: $6.73 billion

Holding a Guinness World Record for creating the world’s fastest conveyor pizza oven, Middleby (NYSE:MIDD) is a food service and equipment manufacturer.

Why Do We Think MIDD Will Underperform?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Projected sales growth of 2.1% for the next 12 months suggests sluggish demand
3. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 1.2% annually

Middleby’s stock price of $132 implies a valuation ratio of 15.3x forward P/E. Read our free research report to see why you should think twice about including MIDD in your portfolio.

Supernus Pharmaceuticals (SUPN)

Market Cap: $2.84 billion

With a diverse portfolio of eight FDA-approved medications targeting neurological conditions, Supernus Pharmaceuticals (NASDAQ:SUPN) develops and markets treatments for central nervous system disorders including epilepsy, ADHD, Parkinson's disease, and migraine.

Why Are We Wary of SUPN?

1. Sales trends were unexciting over the last two years as its 2.4% annual growth was below the typical healthcare company
2. Modest revenue base of $665.1 million gives it less fixed cost leverage and fewer distribution channels than larger companies
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Supernus Pharmaceuticals is trading at $50.67 per share, or 22.9x forward P/E. To fully understand why you should be careful with SUPN, check out our full research report (it’s free for active Edge members).

Kyndryl (KD)

Market Cap: $6.54 billion

Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl (NYSE:KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.

Why Does KD Worry Us?

1. Sales tumbled by 4.6% annually over the last five years, showing market trends are working against its favor during this cycle
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.5% for the last five years
3. Negative returns on capital show management lost money while trying to expand the business

At $28.30 per share, Kyndryl trades at 11x forward P/E. If you’re considering KD for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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