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 pass on and some alternatives you should look into instead.
Kura Sushi (KRUS)
Market Cap: $460.8 million
Known for its conveyor belt that transports dishes to diners, Kura Sushi (NASDAQ:KRUS) is a chain of sushi restaurants serving traditional Japanese fare with a touch of modernity and technology.
Why Are We Wary of KRUS?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Kura Sushi is trading at $37.60 per share, or 280.7x forward P/E. Check out our free in-depth research report to learn more about why KRUS doesn’t pass our bar.
Kimball Solutions (KE)
Market Cap: $628.4 million
Founded in 1961, Kimball Solutions (NASDAQ:KE) is a global contract manufacturer specializing in electronics and manufacturing solutions for automotive, medical, and industrial markets.
Why Do We Avoid KE?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 8.6% annually over the last two years
- Earnings per share have dipped by 13.4% annually over the past five years, which is concerning because stock prices follow EPS over the long term
- Poor free cash flow margin of -0.8% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $25.87 per share, Kimball Solutions trades at 16.6x forward P/E. Read our free research report to see why you should think twice about including KE in your portfolio.
Bristow Group (VTOL)
Market Cap: $1.14 billion
Operating what's essentially an airborne taxi service for some of the world's most remote workplaces, Bristow Group (NYSE:VTOL) operates helicopters that transport workers to offshore oil and gas platforms and conduct search and rescue operations.
Why Do We Pass on VTOL?
- 6.1% annual revenue growth over the last five years was slower than its energy upstream and integrated energy peers
- Smaller revenue base of $1.56 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Low free cash flow margin of 0% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Bristow Group’s stock price of $38.61 implies a valuation ratio of 5.3x forward EV-to-EBITDA. To fully understand why you should be careful with VTOL, check out our full research report (it’s free).
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