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.
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.
Bark (BARK)
Market Cap: $255.4 million
Making a name for itself with the BarkBox, Bark (NYSE:BARK) specializes in subscription-based, personalized pet products.
Why Are We Wary of BARK?
- Number of orders has disappointed over the past two years, indicating weak demand for its offerings
- Suboptimal cost structure is highlighted by its history of operating losses
- Low free cash flow margin of 1.3% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $1.51 per share, Bark trades at 113.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why BARK doesn’t pass our bar.
TTM Technologies (TTMI)
Market Cap: $2.25 billion
With its name derived from "Time To Market" – highlighting its focus on rapid production capabilities, TTM Technologies (NASDAQ:TTMI) is one of the world's largest manufacturers of printed circuit boards (PCBs) and specialized RF components for aerospace, defense, automotive, and telecommunications industries.
Why Do We Steer Clear of TTMI?
- Sales tumbled by 1.1% annually over the last two years, showing market trends are working against its favor during this cycle
- Earnings per share were flat over the last two years and fell short of the peer group average
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
TTM Technologies’s stock price of $22.05 implies a valuation ratio of 11.4x forward price-to-earnings. To fully understand why you should be careful with TTMI, check out our full research report (it’s free).
ScanSource (SCSC)
Market Cap: $845.6 million
Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ:SCSC) is a hybrid technology distributor that connects hardware, software, and cloud services from leading tech suppliers to resellers and business customers.
Why Is SCSC Risky?
- Sales tumbled by 10.4% annually over the last two years, showing market trends are working against its favor during this cycle
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 11.7% annually, worse than its revenue
- ROIC of 7.8% reflects management’s challenges in identifying attractive investment opportunities
ScanSource is trading at $36.53 per share, or 9.8x forward price-to-earnings. If you’re considering SCSC for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.
