Although speculative enterprises tend to draw in a loyal band of followers, certain circumstances call for decisive action, as these small-cap stocks to avoid in August confirms. Nobody wants to be the guy or gal throwing in the towel. However, you can’t ignore clear signs of trouble. Certainly, just because warning signs pop up doesn’t mean that risky small-cap stocks are doomed for failure. However, just like in baseball, it’s a long season. And with that, you must play the probabilities well. That’s especially the case with small-capitalization trades, which are volatile in the best of times.
Of course, you’ll want to conduct your own due diligence. But when you do, chances are, you’ll want to sell these small-cap stocks mentioned below. Suffering from a poor combination of rough fundamentals and less-than-ideal financial metrics, compromised public companies risk damaging your portfolio.
Ultimately, you want to look out for number one. With that, below are the worst small-cap stocks for August.
While talking about small-cap stocks to avoid in August (or any month) is almost sure to incur hate mail, I believe with Vroom (NASDAQ:VRM), even ardent bulls will surely recognize while so many folks are skeptical about it. True, it’s been on a good run this year. However, since its public market debut, shares have hemorrhaged nearly 97% of equity value.
If that wasn’t enough to convince you that VRM ranks among the risky small-cap stocks to avoid, then you should consider the ugly print for its second quarter. Although the company’s revenue haul of $225.18 million beat analysts’ expectations, it was far below the $475.44 million posted in the year-ago quarter. Thus, even with Vroom mitigating an expected loss of 51 cents by posting “only” 48 cents in the red, investors rushed for the exits. And by rushed, I’m talking a one-day loss of 30.46%.
If you want to avoid small-cap stocks before crash, this one already did. Still, even with this ugliness, the analysts’ price target calls for $1.13, implying almost 18% downside risk. Yikes.
I’m not entirely sure if there are any Groupon (NASDAQ:GRPN) fans out there ready to defend the brand’s honor. However, if you happen to fall into this category, you might want to reconsider. By arguably most measures, GRPN ranks among the small-cap stocks to avoid in August.
For one thing, even with the broader momentum this year, GRPN’s performance has been underwhelming. Since the Jan. opener, it lost over 10% of its equity value. In the trailing year, shares are down over 37%. Over the past five years, Groupon is in the red to the tune of nearly 91%. Heading over to Gurufocus, the investment data aggregator warns about four red flags. These include poor business operation (as determined by a lowly Piotroski F-Score) and a distressed balance sheet, as evidenced by its negative Altman Z-Score.
While analysts technically view GRPN as a consensus hold, the reality is that it’s one of the worst small-cap stocks for August. On average, the experts’ price target sits at $4.98, implying over 37% downside risk. Again, yikes.
At first glance, apparel manufacturer Duluth (NASDAQ:DLTH) might not seem like such a bad idea. Since the Jan. opener, DLTH gained nearly 23% of its equity value. On a more fundamental note, many folks surely appreciate its quirky, hilarious commercials. And I’m sure the products are awesome, too, especially for those conducting rugged activities. Sadly, though, it’s one of the small-cap stocks to avoid in August.
Unfortunately, its numbers aren’t that great. For example, Duluth’s three-year revenue growth rate comes in at only 1.4% on a per-share basis. That’s worse than 57.32% of its peers. As well, its trailing-year net margin slipped slightly into negative territory. Yes, Duluth has a history of consistent profitability. But that might be under threat if the consumer economy falters.
Also, balance sheet stability is questionable, with Duluth carrying a risky cash-to-debt ratio of only 0.05x. Finally, it’s not just I saying sell these small-cap stocks. Rather, of the two analysts currently covering shares, both of them rate it a hold. Also, the average price target sits at $6, implying more than 20% downside risk.
Core Lithium (CXOXF)
On the surface, Core Lithium (OTCMKTS:CXOXF) would seem a relevant idea. After all, electric vehicles represent the future of transportation and personal mobility. That being the case, the world needs more lithium production. Fortuitously, the Australian lithium miner provides exactly that. However, investors believe that CXOXF ranks among the small-cap stocks to avoid in August.
Since the Jan. opener, shares fell more than 42%. In the trailing 365 days, they collapsed to the tune of over 63%. Worryingly, just in the past five sessions, CXOXF slipped 13%. It may be time to get out while you still can. To be fair, Core Lithium features a decently stable balance sheet. However, with its three-year EBITDA and free cash flow growth rates falling into negative territory, one has to question its viability.
Not surprisingly, analysts are not taking their chances, assessing CXOXF as a consensus moderate sell. There’s some debate about the trajectory of shares, with the average price target landing at 42 cents. This implies over 12% upside. Still, with five out of seven experts rating it a sell, it’s one of the risky small-cap stocks.
Fortescue Metals (FSUMF)
At a cursory glance, Fortescue Metals (OTCMKTS:FSUMF) doesn’t seem like one of the small-cap stocks to avoid in August. Over the trailing five-year period, FSUMF gained nearly 349% of its equity value. Further, the underlying iron ore business seems boring, but relevant. Per its public profile, Fortescue is the fourth-largest iron ore producer in the world.
Not only that, the financials seem quite impressive, if I’m being honest. First, the company enjoys fiscal stability, as evidenced by its Altman Z-Score of 5.15. Its three-year revenue growth rate clocks in at 19.9%, above 68.91% of its peers. As well, it’s consistently profitable, commanding a trailing-year net margin of nearly 34%. So, what gives?
Analysts may be pessimistic about the outlook for low-grade iron ore compared to the higher grade iterations. You can tell FSUMF appears to be one of the worst small-cap stocks for August because no one within the past year issued a buy rating. Indeed, Fortescue suffers a consensus moderate sell view. Plus, the price target of $11.98 implies 13% downside risk.
Sonida Senior Living (SNDA)
If I were to wager a guess without looking into the details, I’d peg Sonida Senior Living (NYSE:SNDA) as an enterprise to invest in for the long haul. With the baby boomer population only getting older, demand for senior living solutions should skyrocket. Unfortunately, that’s not the case with SNDA, which features a market cap of only $66.14 million. It’s easily one of the small-cap stocks to avoid in August.
Since the beginning of this year, SNDA fell more than 29%. In the trailing one-year period, shares gave up almost 47% of equity value. One of the glaring issues with Sonida on a financial level is its top line erosion. Over the past three years, Sonida’s revenue “growth” slipped to 44.7% below breakeven.Adding to the pressure, the company suffers from a very poor balance sheet. In particular, its cash-to-debt ratio sits at 0.02X, ranking worse than 95.2% of its peers. Finally, Barclays sees little reason to hold onto SNDA, pegging it a sell. As well, the research arm forecasts a price of $5, implying almost 47% downside risk.
Talis Biomedical (TLIS)
Headquartered in Redwood City, California, Talis Biomedical (NASDAQ:TLIS) delivers lab quality test results for infectious diseases at the point of care. Making its public market debut in early 2021, enthusiasm was sky high for such an enterprise. Unfortunately, fading fears of the Covid-19 pandemic coincided with a severe erosion in TLIS. Over the trailing one-year period, TLIS gave up over 33% of equity value. Since its 2021 debut, the security hemorrhaged more than 98%. If there was ever an admonishment to sell these small-cap stocks, Talis would deserve it.
Also, its financial profile presents significant concerns, even for speculators. Yes, Talis enjoys a cash-to-debt ratio of 7.68x. However, its Altman Z-Score shows a business in distress. As well, its profit margins are hopefully sinking in red ink. Right now, BTIG’s Mark Massaro is warning off clients regarding TLIS, which the expert rates as a sell. Even worse, the price target of $5.25 implies nearly 32% downside risk.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.