7 Small-Cap Stocks That Are Not Worth A Second Glance

| January 28, 2020

Not all small-cap stocks are doing well, even with the market hitting new highs

Sure, the Dow Jones Industrial Average and the S&P 500 are at record highs.

But that doesn’t mean all the stocks in the stock market are doing well.

There are over 3,700 stocks that are traded on U.S. exchanges. And those two indexes only cover the biggest of them.

There are plenty of mid-sized and small companies that can be great stocks when times are good, to be sure. But they can also struggle to find their footing when sectors get tight or are in transition.

The seven small-cap stocks not worth a second glance below, are just such stocks. They are either in industries where there’s a shift in technologies or are in sectors where investors are rotating out of the smaller firms for the security of larger names. As a result, they just don’t measure up in the stock-picking system I use for my Growth Investor recommendations.

My Portfolio Grader has given these all “F” ratings, which means they’re not a good idea, even for bargain hunters.

Small-Cap Stocks to Sell: Eagle Bulk Shipping (EGLE)

Eagle Bulk Shipping (NASDAQ:EGLE) is, as its name implies, a dry bulk shipper. That means it ships goods that aren’t “wet,” like oil. Think coal, grain, fertilizer and other commodities on shipping routes around the world.

There’s actually an index that tracks dry goods shipping, because it’s one of those forward-looking indicators on how the global economy is doing. When it’s rising, demand for goods is up.

It’s like looking at U.S. railroads or trucking companies to get an indicator of the U.S. economy. But here, it’s not about energy, it’s about other industrial goods.

The Baltic Dry Index is its name. And it’s down almost 30% in the past year. And it’s sitting where it was about five years ago, at multi-year low.

While the stock is off about 10% in the past year, the fact is, some of these commodities are seeing different shifts in production and distribution. Dry shipping may never be the same and EGLE stock may be at the beginning of the end.

Pacific Drilling (PACD)

Pacific Drilling (NYSE:PACD) is an offshore contract drilling company that specializes in ultra-deepwater drilling services.

The problem with this is twofold.

First, since there’s so much supply around the world with current operations, the need for more drilling isn’t a pressing demand.

Second, ultra-deepwater drilling is expensive and was a solution that was gaining traction before unconventional drilling (like fracking) become the hot new technology and unleashed a fracking boom across the U.S. and other parts of the world.

Unconventional drilling is much cheaper as well. So, PACD stock is suffering from both the broad sector demand issue as well as a niche, premium sector issue.

The stock is down 80% in the past year and while it may not fall much more, it may not go up much for quite a while. There are much better investments right now.

BlackRock Capital Investment (BKCC)

BlackRock Capital Investment (NASDAQ:BKCC) is a subsidiary of the massive asset management firm BlackRock (NYSE:BLK). It considers itself a business development company.

The goal of BKCC is to provide secured financing for mid-sized businesses. It’s set up as a total return play, which means its goal is to provide growth as well as income to investors.

And the while income side is doing well — it’s delivering an 11% dividend currently — the growth side is not doing so well. It’s off nearly 20% in the last year. And that was before JPMorgan downgraded the stock this week from “overweight” to “neutral,” basically a double downgrade.

If institutional investors are moving away from this stock, you can be sure that whatever the issues, it will be a while before BKCC is back in good graces. The dividend is generous, but not if the growth side remains negative.

Gannett (GCI)

Gannett (NYSE:GCI) is the publisher of USA Today as well as a host of other local newspapers and related publications around the U.S.

This company was a juggernaut when it launched USA Today in 1982. No one had launched a daily national newspaper for many years. And it ushered in a new concept in news and information delivery.

But that pioneering spirit has now turned into more of the survival instincts of the Donner Party. Its main source of revenue has dried up, and there’s a lot of competition in a shrinking sector. Even local papers aren’t able to keep up with online publications and free information.

And the economies of scale on the local level are elusive. Plus you can only cut so much fat and muscle until you hit bone. What you need to survive and thrive is scalability — which is why I’m focusing on a key technological innovation that provides just that.

Meanwhile, this stock is off 50% in the past year, so even its massive 22% dividend doesn’t help. Plus, that dividend is likely unsustainable for any period in time and once it’s cut, the stock will sink even more quickly.

Fossil (FOSL)

Fossil (NASDAQ:FOSL) was an exciting growth stock about 10-15 years ago. But that hasn’t been the case for a while.

And its third-quarter numbers have been hammered, with a warning for the fourth quarter as well. It’s a fashion watchmaker and its distribution channels were heavily in department stores and larger retailers where its low- to mid-market watches became very popular.

But the rise of e-commerce started to challenge its distribution strategy. And the death of shopping malls as well as the transition of the big-box retailers to online sales also hurt its margins.

Digital in general has also been tough. It doesn’t make smart watches or products that integrate any tech devices.

But the trade war with China was one of the final straws. Parts and production became more expensive. And being a small company, it couldn’t just shift production to another country where it had facilities.

All these headwinds are hurting the stock, which is down 52% yet still has a trailing price-to-earnings ratio above 200.

Peabody Energy (BTU)

Peabody Energy (NYSE:BTU) used to be one of the top energy companies in the U.S. It was one of the largest coal companies in America, and then, in the world. It currently has 23 mines (surface and underground) in the U.S. and Australia.

That means it’s strategically placed to ship coal to U.S. customers and China, as well as other Asian countries.

The problem is, King Coal has been dethroned. It’s increasingly becoming a third-rate fuel choice.

Fracking in the U.S. has made natural gas a cheaper and more efficient fuel. And China is transitioning its power plants off of coal as well, to show that it’s modernizing.

As a pure coal play, BTU is not well positioned for this dethroning. The stock is off 74% in the past year and even if demand rises now that the U.S.-China trade war is off the boil, it’s a dying industry.

Groupon (GRPN)

Groupon (NASDAQ:GRPN) was a revolutionary idea when it hit the scene in 2008. By 2011, when it went public, it was looking at a market valuation of $1.4 billion.

Fast forward a decade later. After numerous acquisitions, global expansion and lots of strategic partners, the stock has a market capitalization of $1.6 billion.

That’s not a lot of growth. And it’s safe to say expectations are significantly lower than they were a decade ago.

Unfortunately for GRPN stock, its model of helping small, local businesses increase visibility and online awareness by offering deals has been overtaken by technology.

It’s now pretty easy for companies to set up their own sites or pay a local company — or even a kid — to build a website. And social media has also expanded small companies’ ability to gain eyeballs, without having to offer the deals they do on Groupon.

It still has its uses, but its potential has been overtaken by technology and it’s finding it hard to pivot.

GRPN stock is off 27% in the past year and the big firms are downgrading the stock. Don’t try to catch this falling knife.

Note: Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. Louis may hold some of the aforementioned securities in one or more of his newsletters.

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Category: Stocks To Avoid

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The author of this article is a contributor to InvestorPlace.com.