3 Small-Cap Stocks with Warning Signs

Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.

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.

Columbia Sportswear (COLM)

Market Cap: $2.97 billion

Originally founded as a hat store in 1938, Columbia Sportswear (NASDAQ:COLM) is a manufacturer of outerwear, sportswear, and footwear designed for outdoor enthusiasts.

Why Is COLM Risky?

1. Constant currency revenue growth has disappointed over the past two years and shows demand was soft
2. Poor free cash flow margin of 9.7% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

At $54.75 per share, Columbia Sportswear trades at 19.1x forward P/E. Dive into our free research report to see why there are better opportunities than COLM.

Bally's (BALY)

Market Cap: $812.2 million

Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE:BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.

Why Do We Avoid BALY?

1. Muted 2% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Bally’s stock price of $16.52 implies a valuation ratio of 11.8x forward EV-to-EBITDA. To fully understand why you should be careful with BALY, check out our full research report (it’s free for active Edge members).

Pinnacle Financial Partners (PNFP)

Market Cap: $7.34 billion

Founded in 2000 with a focus on delivering big-bank capabilities with community bank personalization, Pinnacle Financial Partners (NASDAQ:PNFP) is a Tennessee-based financial holding company that provides banking, investment, trust, mortgage, and insurance services to businesses and individuals.

Why Are We Cautious About PNFP?

1. Weak unit economics are reflected in its net interest margin of 3.2%, one of the worst among bank companies
2. Costs have risen faster than its revenue over the last four years, causing its efficiency ratio to worsen by 7.8 percentage points
3. Estimated tangible book value per share growth of 2.1% for the next 12 months implies profitability will slow from its two-year trend

Pinnacle Financial Partners is trading at $96.66 per share, or 1.1x forward P/B. Read our free research report to see why you should think twice about including PNFP in your portfolio.

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