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.
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 swipe left on and some alternatives you should look into instead.
MGM Resorts (MGM)
Market Cap: $9.15 billion
Operating several properties on the Las Vegas Strip, MGM Resorts (NYSE:MGM) is a global hospitality and entertainment company known for its resorts and casinos.
Why Do We Think MGM Will Underperform?
- Scale is a double-edged sword because it limits the company's growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 6% for the last five years
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- 12× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $32 per share, MGM Resorts trades at 14.2x forward price-to-earnings. Check out our free in-depth research report to learn more about why MGM doesn’t pass our bar.
Organon (OGN)
Market Cap: $3.80 billion
Spun off from Merck in 2021 to create a company dedicated to addressing unmet needs in women's health, Organon (NYSE:OGN) is a global healthcare company focused on improving women's health through prescription therapies, medical devices, biosimilars, and established medicines.
Why Do We Pass on OGN?
- Annual sales declines of 3.6% for the past five years show its products and services struggled to connect with the market during this cycle
- Inability to adjust its cost structure while its revenue declined over the last five years led to a 17.3 percentage point drop in the company’s adjusted operating margin
- Earnings per share have contracted by 19.8% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
Organon’s stock price of $14.76 implies a valuation ratio of 3.6x forward price-to-earnings. If you’re considering OGN for your portfolio, see our FREE research report to learn more.
First Advantage (FA)
Market Cap: $2.43 billion
Processing approximately 100 million background checks annually across more than 200 countries and territories, First Advantage (NASDAQ:FA) provides employment background screening, identity verification, and compliance solutions to help companies manage hiring risks.
Why Is FA Not Exciting?
- 3.1% annual revenue growth over the last two years was slower than its business services peers
- Free cash flow margin shrank by 7.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
First Advantage is trading at $14.08 per share, or 14.3x forward price-to-earnings. Read our free research report to see why you should think twice about including FA in your portfolio.
Stocks We Like More
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