3 Small-Cap Stocks That Concern Us

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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

Post (POST)

Market Cap: $5.80 billion

Founded in 1895, Post (NYSE:POST) is a packaged food company known for its namesake breakfast cereal and healthier-for-you snacks.

Why Are We Cautious About POST?

1. Shrinking unit sales over the past two years suggest it might have to lower prices to stimulate growth
2. Free cash flow margin shrank by 1.9 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Post’s stock price of $106.74 implies a valuation ratio of 13.9x forward P/E. Read our free research report to see why you should think twice about including POST in your portfolio.

Funko (FNKO)

Market Cap: $177.9 million

Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ:FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.

Why Do We Pass on FNKO?

1. Products and services have few die-hard fans as sales have declined by 9.7% annually over the last two years
2. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
3. High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate

At $3.25 per share, Funko trades at 2.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why FNKO doesn’t pass our bar.

Orion (ORN)

Market Cap: $378.7 million

Established in 1994, Orion (NYSE:ORN) provides construction services for marine infrastructure and industrial projects.

Why Do We Steer Clear of ORN?

1. Demand cratered as it couldn’t win new orders over the past two years, leading to an average 1.7% decline in its backlog
2. Issuance of new shares over the last five years caused its earnings per share to fall by 3.8% annually while its revenue grew
3. Low free cash flow margin of -0.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

Orion is trading at $9.49 per share, or 37.2x forward P/E. Dive into our free research report to see why there are better opportunities than ORN.

High-Quality Stocks for All Market Conditions

If your portfolio success hinges on just 4 stocks, your wealth is built on fragile ground. You have a small window to secure high-quality assets before the market widens and these prices disappear.

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