3 Small-Cap Stocks with Warning Signs

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

Hilton Grand Vacations (HGV)

Market Cap: $3.58 billion

Spun off from Hilton Worldwide in 2017, Hilton Grand Vacations (NYSE:HGV) is a global timeshare company that provides travel experiences for its customers through its timeshare resorts and club membership programs.

Why Do We Think Twice About HGV?

1. Muted 12.5% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
3. High net-debt-to-EBITDA ratio of 11× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $41.85 per share, Hilton Grand Vacations trades at 0.7x forward price-to-sales. Read our free research report to see why you should think twice about including HGV in your portfolio.

Timken (TKR)

Market Cap: $5.43 billion

Established after the founder noticed the difficulty freight wagons had making sharp turns, Timken (NYSE:TKR) is a provider of industrial parts used across various sectors.

Why Do We Avoid TKR?

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. Anticipated sales growth of 2.6% for the next year implies demand will be shaky
3. Earnings per share have contracted by 1.3% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance

Timken’s stock price of $77.95 implies a valuation ratio of 8.4x forward EV-to-EBITDA. If you’re considering TKR for your portfolio, see our FREE research report to learn more.

UFP Industries (UFPI)

Market Cap: $5.42 billion

Beginning as a lumber supplier in the 1950s, UFP Industries (NASDAQ:UFPI) is a holding company making building materials for the construction, retail, and industrial sectors.

Why Should You Dump UFPI?

1. Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
3. Diminishing returns on capital suggest its earlier profit pools are drying up

UFP Industries is trading at $92.79 per share, or 16.6x forward P/E. Dive into our free research report to see why there are better opportunities than UFPI.

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