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.
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.
Wendy’s (WEN)
Market Cap: $2.26 billion
Founded by Dave Thomas in 1969, Wendy’s (NASDAQ:WEN) is a renowned fast-food chain known for its fresh, never-frozen beef burgers, flavorful menu options, and commitment to quality.
Why Does WEN Give Us Pause?
Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Wendy’s stock price of $11.72 implies a valuation ratio of 11.6x forward P/E. Dive into our free research report to see why there are better opportunities than WEN.
Jazz Pharmaceuticals (JAZZ)
Market Cap: $6.51 billion
Originally founded in 2003 and now headquartered in Ireland following a 2012 tax inversion merger, Jazz Pharmaceuticals (NASDAQGS:JAZZ) develops and markets medicines for sleep disorders, epilepsy, and cancer, with a focus on treatments for patients with limited therapeutic options.
Why Does JAZZ Worry Us?
Muted 4.3% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 6.7 percentage points
Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam
Jazz Pharmaceuticals is trading at $107.51 per share, or 4.6x forward P/E. To fully understand why you should be careful with JAZZ, check out our full research report (it’s free).
U.S. Cellular (USM)
Market Cap: $5.32 billion
Operating as a majority-owned subsidiary of Telephone and Data Systems since its founding in 1983, US Cellular (NYSE:USM) is a regional wireless telecommunications provider serving 4.6 million customers across 21 states with mobile phone, internet, and IoT services.
