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.
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.
Shake Shack (SHAK)
Market Cap: $3.65 billion
Started as a hot dog cart in New York City's Madison Square Park, Shake Shack (NYSE: SHAK) is a fast-food restaurant known for its burgers and milkshakes.
Why Are We Wary of SHAK?
- Subpar operating margin of 2.4% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Low returns on capital reflect management’s struggle to allocate funds effectively
Shake Shack’s stock price of $90.20 implies a valuation ratio of 63.9x forward P/E. Read our free research report to see why you should think twice about including SHAK in your portfolio.
Lincoln Financial Group (LNC)
Market Cap: $6.36 billion
Founded in 1905 by a group of Fort Wayne, Indiana businessmen who named the company after Abraham Lincoln, Lincoln National Corporation (NYSE: LNC) provides insurance, retirement plans, and wealth management products through its subsidiaries, operating under four main segments: Annuities, Life Insurance, Group Protection, and Retirement Plan Services.
Why Are We Cautious About LNC?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Net premiums earned plateaued over the last five years, signaling weak incremental demand for its insurance policies
- Annual book value per share declines of 15.1% for the past five years show its capital management struggled during this cycle
At $33.34 per share, Lincoln Financial Group trades at 0.6x forward P/B. Check out our free in-depth research report to learn more about why LNC doesn’t pass our bar.
Ellington Financial (EFC)
Market Cap: $1.49 billion
Operating under the guidance of Ellington Management Group, a respected name in structured credit markets, Ellington Financial (NYSE: EFC) acquires and manages a diverse portfolio of mortgage-related, consumer-related, and other financial assets to generate returns for investors.
Why Is EFC Risky?
- Incremental sales over the last five years were less profitable as its 2.7% annual earnings per share growth lagged its revenue gains
- Annual tangible book value per share declines of 5.6% for the past five years show its capital management struggled during this cycle
- Low return on equity reflects management’s struggle to allocate funds effectively
Ellington Financial is trading at $11.92 per share, or 0.9x forward P/B. Read our free research report to see why you should think twice about including EFC in your portfolio.
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