3 Small-Cap Stocks We Find Risky

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.

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 are three small-cap stocks to swipe left on and some alternatives you should look into instead.

ON24 (ONTF)

Market Cap: $334.2 million

Powering over 1,700 companies' virtual marketing efforts since 1998, ON24 (NYSE:ONTF) provides a cloud-based platform that enables businesses to create interactive digital experiences and capture actionable data from customer engagement.

Why Do We Think ONTF Will Underperform?

1. Offerings couldn’t generate interest over the last year as its billings have averaged 8.1% declines
2. Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
3. Poor expense management has led to operating margin losses

ON24’s stock price of $7.87 implies a valuation ratio of 2.5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than ONTF.

Prosperity Bancshares (PB)

Market Cap: $7.12 billion

With a network of banking centers spanning the Lone Star State and beyond, Prosperity Bancshares (NYSE:PB) operates full-service banking locations throughout Texas and Oklahoma, offering a wide range of financial products and services to businesses and consumers.

Why Do We Steer Clear of PB?

1. Net interest income stagnated over the last five years and signal the need for new growth strategies
2. Flat earnings per share over the last five years underperformed the sector average
3. Projected tangible book value per share decline of 4.9% for the next 12 months points to tough credit quality challenges ahead

At $72.95 per share, Prosperity Bancshares trades at 0.9x forward P/B. If you’re considering PB for your portfolio, see our FREE research report to learn more.

Atmus Filtration Technologies (ATMU)

Market Cap: $4.99 billion

Spun out of Cummins in 2023 after 65 years as part of the engine maker, Atmus Filtration Technologies (NYSE:ATMU) manufactures filters for trucks, construction equipment, and agriculture machinery to reduce emissions and protect engines.

Why Does ATMU Fall Short?

1. 3.4% annual revenue growth over the last two years was slower than its industrials peers
2. Gross margin of 26.2% reflects its high production costs
3. Free cash flow margin dropped by 2.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Atmus Filtration Technologies is trading at $61.20 per share, or 14.3x forward EV-to-EBITDA. To fully understand why you should be careful with ATMU, check out our full research report (it’s free).

High-Quality Stocks for All Market Conditions

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