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.
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 is one small-cap stock that could be the next big thing and two that may have trouble.
Two Small-Cap Stocks to Sell:
Transcat (TRNS)
Market Cap: $821.1 million
Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ: TRNS) provides measurement instruments and supplies.
Why Are We Cautious About TRNS?
- Earnings per share fell by 15.9% annually over the last two years while its revenue grew, partly because it diluted shareholders
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Transcat’s stock price of $87.69 implies a valuation ratio of 43.8x forward P/E. If you’re considering TRNS for your portfolio, see our FREE research report to learn more.
Amentum (AMTM)
Market Cap: $4.69 billion
With operations spanning approximately 80 countries and a workforce of specialized engineers and technical experts, Amentum Holdings (NYSE: AMTM) provides advanced engineering and technology solutions to U.S. government agencies, allied governments, and commercial enterprises across defense, energy, and space sectors.
Why Does AMTM Worry Us?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Projected sales decline of 1.3% for the next 12 months points to an even tougher demand environment ahead
- Low free cash flow margin of 2.2% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Amentum is trading at $19.28 per share, or 7.7x forward P/E. Read our free research report to see why you should think twice about including AMTM in your portfolio.
One Small-Cap Stock to Buy:
Graham Corporation (GHM)
Market Cap: $1.02 billion
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 Will GHM Outperform?
- Annual revenue growth of 17.9% over the last two years was superb and indicates its market share increased during this cycle
- Operating margin improvement of 8.8 percentage points over the last five years demonstrates its ability to scale efficiently
- Earnings growth has massively outpaced its peers over the last two years as its EPS has compounded at 27.1% annually
At $87.21 per share, Graham Corporation trades at 46.8x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
Stocks We Like Even More
ONE MORE THING: Top 5 Growth Stocks. The biggest stock winners almost always had one thing in common before they ran. Revenue growing like crazy. Meta. CrowdStrike. Broadcom. Our AI flagged all three. They returned 315%, 314%, and 455%, respectively.
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+1,154% between June 2020 and June 2025). Find your next big winner with StockStory today.
