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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Concrete Pumping (BBCP)
Market Cap: $379.8 million
Going public via SPAC in 2018, Concrete Pumping (NASDAQ:BBCP) is a provider of concrete pumping and waste management services in the United States and the United Kingdom.
Why Does BBCP Give Us Pause?
- Annual sales declines of 5.7% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have contracted by 47.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Concrete Pumping is trading at $7.52 per share, or 51.1x forward P/E. If you’re considering BBCP for your portfolio, see our FREE research report to learn more.
Quest Resource (QRHC)
Market Cap: $24.1 million
Recycling corporate waste to help companies be more sustainable, Quest Resource (NASDAQ:QRHC) is a provider of waste and recycling services.
Why Do We Think QRHC Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 6.9% annually over the last two years
- Low free cash flow margin of -0.3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $1.14 per share, Quest Resource trades at 8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including QRHC in your portfolio.
WesBanco (WSBC)
Market Cap: $3.43 billion
Tracing its roots back to 1870 in West Virginia, WesBanco (NASDAQ:WSBC) is a bank holding company that provides retail and commercial banking, trust services, insurance, and investment products through its subsidiaries across several Midwestern and Mid-Atlantic states.
Why Does WSBC Fall Short?
- Inferior net interest margin of 3.4% means it must compensate for lower profitability through increased loan originations
- Products and services are facing profitability challenges during this cycle, as seen in its flat tangible book value per share over the last five years
- Low return on equity reflects management’s struggle to allocate funds effectively
WesBanco’s stock price of $36.01 implies a valuation ratio of 0.9x forward P/B. Dive into our free research report to see why there are better opportunities than WSBC.
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