1 Small-Cap Stock That Stand Out and 2 to Ignore

Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.

The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here is one small-cap stock that could amplify your portfolio’s returns and two that could be down big.

Two Small-Cap Stocks to Sell:

Semtech (SMTC)

Market Cap: $2.30 billion

A public company since the late 1960s, Semtech (NASDAQ:SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.

Why Should You Dump SMTC?

1. Persistent operating losses and eroding margin over the last five years point to its preference for growth over profits
2. Increased cash burn over the last five years raises questions about the return timeline for its investments
3. Negative returns on capital show that some of its growth strategies have backfired, and its shrinking returns suggest its past profit sources are losing steam

Semtech is trading at $27.52 per share, or 15.7x forward price-to-earnings. Read our free research report to see why you should think twice about including SMTC in your portfolio.

GMS (GMS)

Market Cap: $2.79 billion

Founded in 1971, GMS (NYSE:GMS) distributes specialty building materials including wallboard, ceilings, and insulation products, to the construction industry.

Why Are We Wary of GMS?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Forecasted revenue decline of 3.7% for the upcoming 12 months implies demand will fall off a cliff
3. Earnings per share have dipped by 13.3% annually over the past two years, which is concerning because stock prices follow EPS over the long term

At $73.35 per share, GMS trades at 9.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why GMS doesn’t pass our bar.

One Small-Cap Stock to Buy:

Graham Corporation (GHM)

Market Cap: $326.5 million

Founded when its founder patented a unique design for a vacuum system used in the sugar refining process, Graham (NYSE:GHM) provides vacuum and heat transfer equipment for the energy, petrochemical, refining, and chemical sectors.

Why Do We Love GHM?

1. Market share has increased this cycle as its 17% annual revenue growth over the last five years was exceptional
2. Earnings per share grew annually over the last two years, massively outpacing its peers
3. Free cash flow margin jumped by 5.6 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends

Graham Corporation’s stock price of $31.44 implies a valuation ratio of 25.2x forward price-to-earnings. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.

Stocks We Like Even More

Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.

While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.