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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
AGCO (AGCO)
Market Cap: $8.81 billion
With a history that features both organic growth and acquisitions, AGCO (NYSE: AGCO) designs, manufactures, and sells agricultural machinery and related technology.
Why Should You Sell AGCO?
- Sales tumbled by 16.4% annually over the last two years, showing market trends are working against its favor during this cycle
- Earnings per share have dipped by 21% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Waning returns on capital imply its previous profit engines are losing steam
At $119.00 per share, AGCO trades at 21x forward P/E. Read our free research report to see why you should think twice about including AGCO in your portfolio.
Fortrea (FTRE)
Market Cap: $880.8 million
Spun off from Labcorp in 2023 to focus exclusively on clinical research services, Fortrea (NASDAQ: FTRE) is a contract research organization that helps pharmaceutical, biotech, and medical device companies develop and bring their products to market through clinical trials and support services.
Why Is FTRE Risky?
- Annual sales declines of 2.9% for the past four years show its products and services struggled to connect with the market during this cycle
- Negative returns on capital show management lost money while trying to expand the business, and its falling returns suggest its earlier profit pools are drying up
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Fortrea’s stock price of $9.46 implies a valuation ratio of 12.6x forward P/E. Dive into our free research report to see why there are better opportunities than FTRE.
Insperity (NSP)
Market Cap: $750.8 million
Pioneering the professional employer organization (PEO) industry it helped establish, Insperity (NYSE: NSP) provides human resources outsourcing services to small and medium-sized businesses, handling payroll, benefits, compliance, and HR administration.
Why Do We Pass on NSP?
- Annual revenue growth of 2.5% over the last two years was below our standards for the business services sector
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 26% annually
- Free cash flow margin dropped by 9.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Insperity is trading at $20.25 per share, or 9.2x forward P/E. If you’re considering NSP for your portfolio, see our FREE research report to learn more.
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