Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.
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. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.
The Honest Company (HNST)
Market Cap: $405 million
Co-founded by actress Jessica Alba, The Honest Company (NASDAQ:HNST) sells diapers and wipes, skin care products, and household cleaning products.
Why Do We Avoid HNST?
- Revenue base of $389.8 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- 6.6 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
- Push for growth has led to negative returns on capital, signaling value destruction
The Honest Company’s stock price of $3.65 implies a valuation ratio of 14.2x forward EV-to-EBITDA. If you’re considering HNST for your portfolio, see our FREE research report to learn more.
Laureate Education (LAUR)
Market Cap: $4.33 billion
Founded in 1998 by Douglas L. Becker and based in Miami, Laureate Education (NASDAQ:LAUR) is a global network of higher education institutions.
Why Do We Think Twice About LAUR?
- Demand for its offerings was relatively low as its number of enrolled students has underwhelmed
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 9.3% annually while its revenue grew
- Low returns on capital reflect management’s struggle to allocate funds effectively
Laureate Education is trading at $29.37 per share, or 15.1x forward P/E. Read our free research report to see why you should think twice about including LAUR in your portfolio.
Kemper (KMPR)
Market Cap: $3.09 billion
Originally known as Unitrin until rebranding in 2011, Kemper (NYSE:KMPR) is an insurance holding company that provides automobile, homeowners, life, and other insurance products to individuals and businesses across the United States.
Why Are We Out on KMPR?
- Insurance offerings faced market headwinds this cycle, reflected in stagnant net premiums earned over the last five years
- Earnings per share have contracted by 1.4% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Products and services are facing significant credit quality challenges during this cycle as book value per share has declined by 6.3% annually over the last five years
At $49.24 per share, Kemper trades at 1x forward P/B. Check out our free in-depth research report to learn more about why KMPR doesn’t pass our bar.
Stocks We Like More
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