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.
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.
America's Car-Mart (CRMT)
Market Cap: $361.6 million
With a strong presence in the Southern and Central US, America’s Car-Mart (NASDAQ:CRMT) sells used cars to budget-conscious consumers.
Why Are We Out on CRMT?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Gross margin of 21.1% is below its competitors, leaving less money for marketing and promotions
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
America's Car-Mart is trading at $43.76 per share, or 11.2x forward P/E. Check out our free in-depth research report to learn more about why CRMT doesn’t pass our bar.
Strategic Education (STRA)
Market Cap: $1.77 billion
Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ:STRA) is a career-focused higher education provider.
Why Do We Think STRA Will Underperform?
- Demand for its offerings was relatively low as its number of domestic students has underwhelmed
- Earnings per share fell by 7.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- ROIC of 3.7% reflects management’s challenges in identifying attractive investment opportunities
At $74.84 per share, Strategic Education trades at 12.3x forward P/E. To fully understand why you should be careful with STRA, check out our full research report (it’s free).
Dave & Buster's (PLAY)
Market Cap: $915.2 million
Founded by a former game parlor and bar operator, Dave & Buster’s (NASDAQ:PLAY) operates a chain of arcades providing immersive entertainment experiences.
Why Does PLAY Worry Us?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Cash-burning history makes us doubt the long-term viability of its business model
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Dave & Buster’s stock price of $26.70 implies a valuation ratio of 12.4x forward P/E. Dive into our free research report to see why there are better opportunities than PLAY.
Stocks We Like More
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