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.

WD-40 (WDFC)

Market Cap: $3.12 billion

Short for “Water Displacement perfected on the 40th try”, WD-40 (NASDAQ:WDFC) is a renowned American consumer goods company known for its iconic and versatile spray, WD-40 Multi-Use Product.

Why Does WDFC Worry Us?

1. 6.6% annual revenue growth over the last three years was slower than its consumer staples peers
2. Subscale operations are evident in its revenue base of $603.6 million, meaning it has fewer distribution channels than its larger rivals
3. Capital intensity has ramped up over the last year as its free cash flow margin decreased by 7.1 percentage points

At $232.99 per share, WD-40 trades at 42x forward price-to-earnings. If you’re considering WDFC for your portfolio, see our FREE research report to learn more.

Nexstar Media (NXST)

Market Cap: $5.4 billion

Founded in 1996, Nexstar (NASDAQ:NXST) is an American media company operating numerous local television stations and digital media outlets across the country.

Why Do We Think Twice About NXST?

1. 1.9% annual revenue growth over the last two years was slower than its consumer discretionary peers
2. Forecasted revenue decline of 7.8% for the upcoming 12 months implies demand will fall off a cliff
3. Projected 4.5 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

Nexstar Media is trading at $178.01 per share, or 13x forward price-to-earnings. To fully understand why you should be careful with NXST, check out our full research report (it’s free).

Methode Electronics (MEI)

Market Cap: $238.4 million

Founded in 1946, Methode Electronics (NYSE:MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).

Why Is MEI Risky?

1. Sales stagnated over the last five years and signal the need for new growth strategies
2. Free cash flow margin shrank by 19.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Methode Electronics’s stock price of $6.66 implies a valuation ratio of 10.1x forward price-to-earnings. Check out our free in-depth research report to learn more about why MEI doesn’t pass our bar.

Stocks We Like More

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