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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Saia (SAIA)
Market cap: $9.17 billion
Pivoting its business model after realizing there was more success in delivering produce than selling it, Saia (NASDAQ: SAIA) is a provider of freight transportation solutions.
Why Does SAIA Fall Short?
- 5.6% annual revenue growth over the last two years was slower than its industrials peers
- Earnings per share have dipped by 13.2% 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
Saia’s stock price of $346.14 implies a valuation ratio of 24.8x forward P/E. If you’re considering SAIA for your portfolio, see our FREE research report to learn more.
Merchants Bancorp (MBIN)
Market cap: $2.39 billion
With a strategic focus on low-risk, government-backed lending programs, Merchants Bancorp (NASDAQCM:MBIN) is an Indiana-based bank holding company specializing in multi-family mortgage banking, mortgage warehousing, and traditional banking services.
Why Does MBIN Give Us Pause?
- Sales trends were unexciting over the last two years as its 9.9% annual growth was below the typical banking company
- Earnings per share were flat over the last two years while its revenue grew, showing its incremental sales were less profitable
- Tier one capital ratio of 9.5% raises concerns about the firm’s ability to maintain adequate liquidity
At $52.10 per share, Merchants Bancorp trades at 1.1x forward P/B. Check out our free in-depth research report to learn more about why MBIN doesn’t pass our bar.
Cathay General Bancorp (CATY)
Market cap: $4.26 billion
Founded in 1962 with its first branch in Los Angeles' Chinatown, Cathay General Bancorp (NASDAQ: CATY) operates Cathay Bank, providing commercial banking services to businesses and individuals with a strong presence in Asian-American communities.
Why Are We Hesitant About CATY?
- Annual revenue growth of 6.9% over the last five years was below our standards for the banking sector
- Annual net interest income growth of 6.6% over the last five years was below our standards for the banking sector
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 7.4% annually
Cathay General Bancorp is trading at $64.41 per share, or 1.4x forward P/B. Dive into our free research report to see why there are better opportunities than CATY.
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