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.
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 swipe left on and some alternatives you should look into instead.
Sprinklr (CXM)
Market Cap: $1.49 billion
With a proprietary AI engine processing 450 million data points daily across 30+ digital channels, Sprinklr (NYSE:CXM) provides cloud-based software that helps large enterprises manage customer experiences across social, messaging, chat, and voice channels.
Why Do We Steer Clear of CXM?
- Products, pricing, or go-to-market strategy may need some adjustments as its 6% average billings growth over the last year was weak
- Estimated sales growth of 1.5% for the next 12 months implies demand will slow from its two-year trend
- Operating margin expanded by 1.7 percentage points over the last year as it scaled and became more efficient
Sprinklr’s stock price of $5.98 implies a valuation ratio of 1.7x forward price-to-sales. If you’re considering CXM for your portfolio, see our FREE research report to learn more.
CarMax (KMX)
Market Cap: $5.72 billion
Known for its transparent, customer-centric approach and wide selection of vehicles, Carmax (NYSE:KMX) is the largest automotive retailer in the United States.
Why Should You Dump KMX?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Widely-available products (and therefore stiff competition) result in an inferior gross margin of 6% that must be offset through higher volumes
CarMax is trading at $40.25 per share, or 16.6x forward P/E. Read our free research report to see why you should think twice about including KMX in your portfolio.
Walker & Dunlop (WD)
Market Cap: $1.51 billion
Originating as a small mortgage banking firm during the Great Depression in 1937, Walker & Dunlop (NYSE:WD) provides commercial real estate financing, property sales, appraisal, and investment management services with a focus on multifamily properties.
Why Do We Pass on WD?
- Loans are facing significant end-market challenges during this cycle as net interest income has declined by 40.1% annually over the last five years
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 14.6% annually while its revenue grew
- Tangible book value per share tumbled by 6.8% annually over the last five years, showing banking sector trends are working against its favor during this cycle
At $44.26 per share, Walker & Dunlop trades at 0.8x forward P/B. Check out our free in-depth research report to learn more about why WD doesn’t pass our bar.
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