1 Small-Cap Stock for Long-Term Investors and 2 We Avoid

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.

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 is one small-cap stock that could amplify your portfolio’s returns and two that could be down big.

Two Small-Cap Stocks to Sell:

Surgery Partners (SGRY)

Market Cap: $2.02 billion

With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ:SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.

Why Are We Wary of SGRY?

1. Weak unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

Surgery Partners is trading at $15.75 per share, or 15.7x forward P/E. To fully understand why you should be careful with SGRY, check out our full research report (it’s free for active Edge members).

10x Genomics (TXG)

Market Cap: $2.1 billion

Founded in 2012 by scientists seeking to overcome limitations in traditional biological research methods, 10x Genomics (NASDAQ:TXG) develops instruments, consumables, and software that enable researchers to analyze biological systems at single-cell resolution and spatial context.

Why Do We Think Twice About TXG?

1. 4.2% annual revenue growth over the last two years was slower than its healthcare peers
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Push for growth has led to negative returns on capital, signaling value destruction

At $16.80 per share, 10x Genomics trades at 3.5x forward price-to-sales. Read our free research report to see why you should think twice about including TXG in your portfolio.

One Small-Cap Stock to Buy:

Oscar Health (OSCR)

Market Cap: $3.93 billion

Founded in 2012 to simplify the notoriously complex American healthcare system, Oscar Health (NYSE:OSCR) is a technology-focused health insurance company that offers individual and small group health plans through its cloud-native platform.

Why Will OSCR Outperform?

1. Annual revenue growth of 44.2% over the past two years was outstanding, reflecting market share gains this cycle
2. Earnings growth has trumped its peers over the last four years as its EPS has compounded at 30.3% annually
3. Free cash flow margin jumped by 16.5 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends

Oscar Health’s stock price of $14.90 implies a valuation ratio of 0.3x forward price-to-sales. Is now the right time to buy? See for yourself in our full research report, it’s free for active Edge members.

High-Quality Stocks for All Market Conditions

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