3 Small-Cap Stocks Walking a Fine Line

Core Insights - Small-cap stocks present lucrative investment opportunities due to frequent mispricings resulting from limited analyst coverage [1] - The article identifies three small-cap stocks to avoid and suggests alternatives for investment [2] Company Summaries Valley National Bank (VLY) - Market Cap: $6.13 billion, providing commercial, consumer, and wealth management banking services [3] - Currently trading at $10.78 per share, which is 0.8x forward price-to-book (P/B) ratio [5] BankUnited (BKU) - Market Cap: $3.04 billion, offering commercial lending, deposit services, and treasury solutions primarily in Florida and New York [6] - Trading at $39.96 per share, equivalent to 1x forward P/B ratio [8] Prospect Capital (PSEC) - Market Cap: $1.18 billion, one of the largest publicly traded business development companies in the U.S., providing debt and equity financing to middle-market companies [9] Concerns Regarding Valley National Bank (VLY) - The article suggests there are better investment opportunities than VLY [5] Concerns Regarding BankUnited (BKU) - The article indicates caution is warranted regarding BKU, although specific reasons are not detailed [8] Concerns Regarding Prospect Capital (PSEC) - Sales stagnation over the last two years indicates a need for new growth strategies [11] - Net interest margin of 2.9% is low, necessitating increased loan originations to maintain profitability [11] - Earnings per share have decreased by 17% annually over the last two years, with flat revenue indicating reduced profitability per sale [11] Additional Financial Metrics for Prospect Capital (PSEC) - Net interest income growth of 5.5% over five years is below typical banking firms [12] - A net interest margin of 2.8% is significantly lower than other banks, suggesting unprofitable loans [12] - An expected worsening of the efficiency ratio by 17.5 percentage points in the coming year [12] Sales Performance of Prospect Capital (PSEC) - Annual sales have declined by 8.1% over the past two years, indicating market disconnect [13] - Earnings per share fell by 66.3% annually despite revenue growth, highlighting profitability issues [13] - Tangible book value per share has decreased by 4.3% annually over the last five years due to loan losses and capital returns [13]