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. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.
Energy Recovery (ERII)
Market Cap: $412.4 million
Having saved far more than a trillion gallons of water, Energy Recovery (NASDAQ:ERII) provides energy recovery devices to the water treatment, oil and gas, and chemical processing sectors.
Why Does ERII Give Us Pause?
- Muted 1.6% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
- Projected sales decline of 32.9% for the next 12 months points to a tough demand environment ahead
- Earnings per share were flat over the last five years and fell short of the peer group average
Energy Recovery is trading at $8.05 per share, or 77.8x forward P/E. To fully understand why you should be careful with ERII, check out our full research report (it’s free).
Itron (ITRI)
Market Cap: $3.76 billion
Founded by a small group of engineers who wanted to build a more efficient way to read utility meters, Itron (NASDAQ:ITRI) offers energy and water management products for the utility industry, municipalities, and industrial customers.
Why Are We Wary of ITRI?
- Muted 1.4% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Estimated sales growth of 2.4% for the next 12 months is soft and implies weaker demand
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $83.08 per share, Itron trades at 13.9x forward P/E. Check out our free in-depth research report to learn more about why ITRI doesn’t pass our bar.
Gates Industrial Corporation (GTES)
Market Cap: $6.56 billion
Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE:GTES) offers power transmission and fluid transfer equipment for various industries.
Why Do We Think Twice About GTES?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 3.5% annually
- Underwhelming 7% return on capital reflects management’s difficulties in finding profitable growth opportunities
Gates Industrial Corporation’s stock price of $25.80 implies a valuation ratio of 1.8x forward price-to-sales. To fully understand why you should be careful with GTES, check out our full research report (it’s free).
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