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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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Teradata (TDC)
Market Cap: $2.15 billion
Part of point-of-sale and ATM company NCR from 1991 to 2007, Teradata (NYSE:TDC) offers a software-as-service platform that helps organizations manage and analyze their data across multiple storages.
Why Is TDC Risky?
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Products, pricing, or go-to-market strategy need some adjustments as its billings have averaged 3.4% declines over the last year
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Sales are projected to tank by 3.2% over the next 12 months as its demand continues evaporating
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Gross margin of 60.2% reflects its relatively high servicing costs
At $22.81 per share, Teradata trades at 1.3x forward price-to-sales. To fully understand why you should be careful with TDC, check out our full research report (it’s free).
YETI (YETI)
Market Cap: $2.33 billion
Founded by two brothers from Texas, YETI (NYSE:YETI) specializes in durable outdoor goods including coolers, drinkware, and other gear tailored to adventure enthusiasts.
Why Does YETI Give Us Pause?
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Sales trends were unexciting over the last two years as its 7.1% annual growth was below the typical consumer discretionary company
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Estimated sales growth of 3.5% for the next 12 months implies demand will slow from its two-year trend
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Diminishing returns on capital suggest its earlier profit pools are drying up
YETI’s stock price of $28.75 implies a valuation ratio of 10.4x forward P/E. Check out our free in-depth research report to learn more about why YETI doesn’t pass our bar.
Taylor Morrison Home (TMHC)
Market Cap: $5.89 billion
Named “America’s Most Trusted Home Builder” in 2019, Taylor Morrison Home (NYSE:TMHC) builds single family homes and communities across the United States.
Why Are We Cautious About TMHC?
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Demand cratered as it couldn’t win new orders over the past two years, leading to an average 13% decline in its backlog
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Earnings per share have contracted by 2.6% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
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Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9.4 percentage points