3 Small-Cap Stocks We Find Risky

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.

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 avoid and some other investments you should consider instead.

Churchill Downs (CHDN)

Market Cap: $6.19 billion

Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ:CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.

Why Should You Dump CHDN?

1. Annual revenue growth of 8.7% over the last two years was below our standards for the consumer discretionary sector
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Returns on capital are growing as management invests in more worthwhile ventures

At $90.92 per share, Churchill Downs trades at 13.4x forward P/E. Check out our free in-depth research report to learn more about why CHDN doesn’t pass our bar.

Sabre (SABR)

Market Cap: $818 million

Originally a division of American Airlines, Sabre (NASDAQ:SABR) is a technology provider for the global travel and tourism industry.

Why Do We Pass on SABR?

1. Number of total bookings has disappointed over the past two years, indicating weak demand for its offerings
2. Cash-burning history makes us doubt the long-term viability of its business model
3. High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Sabre’s stock price of $1.99 implies a valuation ratio of 7.1x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than SABR.

Evolent Health (EVH)

Market Cap: $486.9 million

Founded in 2011 to transform how healthcare is delivered to patients with complex needs, Evolent Health (NYSE:EVH) provides specialty care management services and technology solutions that help health plans and providers deliver better care for patients with complex conditions.

Why Is EVH Risky?

1. Disappointing average lives on platform over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Negative returns on capital show that some of its growth strategies have backfired, and its decreasing returns suggest its historical profit centers are aging
3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Evolent Health is trading at $4.29 per share, or 13.6x forward P/E. Read our free research report to see why you should think twice about including EVH in your portfolio.

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