Three Small-Cap Stocks to Drop in February 2024

Investors should consider removing certain small-cap stocks from their portfolios this month. These stocks pose excessive risks for minimal potential gains, making them unsuitable for investors seeking stable returns. This selection of small-cap stocks to sell is based on their declining fundamentals and gloomy future prospects, both in the short term and beyond.

Thus, it is advisable to shield your investment portfolio against potential losses by taking action now to divest from these high-risk small-cap stocks. Doing so can aid in maintaining a well-balanced and robust portfolio, better equipped to endure market turbulence and deliver consistent returns over time.

Presented here are three small-cap stocks that investors should consider eliminating from their portfolios.

Lakeland Industries (LAKE)

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Lakeland Industries (NASDAQ:LAKE)
is a manufacturer and seller of industrial protective clothing and accessories.

Despite its strong performance in the previous quarter, the headwinds facing LAKE appear insurmountable, positioning it as a small-cap stock to sell.

The company is grappling with issues such as adverse effects of currency fluctuations on operating profit and persistent economic challenges in critical markets like China. Moreover, its reliance on strategic acquisitions for growth, as evidenced by its merger and acquisition expansion plans until 2027, exposes it to significant financial and execution risks.

Additionally, the overstretching valuation of LAKE’s stock relative to its fundamentals raises concerns. With a 11.79% surge in its stock price over the past year and trading at 20 times earnings for just $122.45 million in revenue over the last 12 months, LAKE seems primed for a correction. Hence, it may be prudent for current investors to sell a portion of their position to secure profits or exit entirely.

TransMedics (TMDX)

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TransMedics (NASDAQ:TMDX)
purports to be on the cusp of profitability, with anticipated triple-digit EPS growth over the next few years. The company’s net income margins are projected to enhance from a negative 5% in 2023 to a positive 8% in 2026, potentially reaching 20% by the end of the decade.

Nonetheless, there is less optimism on Wall Street, with expectations that the company’s EPS will remain negative beyond FY2026, as per projections.

Holding a stock for this extended period carries significant risks, alongside concerns that it may need to assume additional debt or undertake equity raises, further burdening investors. With $427.61 million in cash and $515.65 million in debt and approximately $112 million in capital expenditures over the last 12 months, the company’s rate of cash burn may necessitate a weakening of its balance sheet or further share issuance, diluting existing investors.

It could be prudent for investors to contemplate selling their holdings in this company and reassessing their position once there is greater certainty regarding its ability to generate profit without diluting shareholders.

Academy Sports and Outdoors (ASO)

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Academy Sports and Outdoors (NASDAQ:ASO)
has garnered attention among investors and analysts, particularly considering its performance in 2023 and the outlook for 2024.

In 2023, ASO reported a quarter earning miss with an EPS of $1.38, against a consensus estimate of $1.58. The revenue for the same quarter was $1.40 billion, down from the expected $1.44 billion, indicating a year-over-year revenue decline of 6.4%.

Another cause for concern for ASO is its financial position, with $274.83 million in cash and $1.80 billion in debt, resulting in a negative cash position of -$20.56 per share, underscoring its financial risk.

Furthermore, its quick ratio of 0.25 implies that for every dollar of current liabilities, the company only has 25 cents in liquid assets available to settle them.

The precipitous decline in ASO’s free cash flow year-over-year is particularly disquieting, plummeting from $970 million in 2020 to $443 million in 2022.

These factors and others lead to the conclusion that ASO is one of those small-cap stocks that should be divested from.

On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.