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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Asana (ASAN)
Market Cap: $3.34 billion
Born from the founders' frustration with the inefficiencies of email-based collaboration at Facebook, Asana (NYSE: ASAN) provides a work management platform that helps organizations track projects, set goals, and manage workflows in a centralized digital workspace.
Why Is ASAN Not Exciting?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 4.3% underwhelmed
- Competitive market dynamics make it difficult to retain customers, leading to a weak 96.3% net revenue retention rate
- Drawn-out sales process reflects its software’s integration hurdles with enterprise clients, restraining customer growth potential
Asana’s stock price of $14.14 implies a valuation ratio of 4.2x forward price-to-sales. If you’re considering ASAN for your portfolio, see our FREE research report to learn more.
Domo (DOMO)
Market Cap: $596.3 million
Named for the Japanese word meaning "thank you very much," Domo (NASDAQ: DOMO) provides a cloud-based business intelligence platform that connects people with real-time data and insights across organizations.
Why Do We Steer Clear of DOMO?
- Products, pricing, or go-to-market strategy need some adjustments as its billings have averaged 2.4% declines over the last year
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $14.60 per share, Domo trades at 1.9x forward price-to-sales. Check out our free in-depth research report to learn more about why DOMO doesn’t pass our bar.
Connection (CNXN)
Market Cap: $1.6 billion
Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ: CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.
Why Are We Out on CNXN?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.3% annually over the last two years
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 6.1% annually
- Low free cash flow margin of 2.3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Connection is trading at $63.03 per share, or 17.4x forward P/E. Dive into our free research report to see why there are better opportunities than CNXN.
High-Quality Stocks for All Market Conditions
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