3 Small-Cap Stocks We Approach with Caution

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.

The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

Fortune Brands (FBIN)

Market Cap: $6.1 billion

Targeting a wide customer base of residential and commercial customers, Fortune Brands (NYSE:FBIN) makes plumbing, security, and outdoor living products.

Why Do We Avoid FBIN?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 9.8 percentage points
3. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 8.9% annually

Fortune Brands’s stock price of $50.86 implies a valuation ratio of 14.5x forward P/E. To fully understand why you should be careful with FBIN, check out our full research report (it’s free).

Kyndryl (KD)

Market Cap: $2.96 billion

Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl (NYSE:KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.

Why Are We Hesitant About KD?

1. Sales tumbled by 4.8% annually over the last five years, showing market trends are working against its favor during this cycle
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Negative returns on capital show management lost money while trying to expand the business

Kyndryl is trading at $13.30 per share, or 5.9x forward P/E. Dive into our free research report to see why there are better opportunities than KD.

FactSet (FDS)

Market Cap: $8.36 billion

Founded in 1978 when financial data was still primarily delivered through paper reports, FactSet (NYSE:FDS) provides financial data, analytics, and technology solutions that investment professionals use to research, analyze, and manage their portfolios.

Why Is FDS Not Exciting?

1. 5.5% annual revenue growth over the last two years was slower than its financials peers
2. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 8.1% annually

At $226.02 per share, FactSet trades at 12.7x forward P/E. If you’re considering FDS for your portfolio, see our FREE research report to learn more.

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