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 be the next 100 bagger and two best left ignored.
Two Small-Cap Stocks to Sell:
Kennametal (KMT)
Market Cap: $2.64 billion
Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE: KMT) is a provider of industrial materials and tools for various sectors.
Why Do We Think Twice About KMT?
- 2% annual revenue growth over the last two years was slower than its industrials peers
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $36.32 per share, Kennametal trades at 6.5x forward P/E. Check out our free in-depth research report to learn more about why KMT doesn’t pass our bar.
Connection (CNXN)
Market Cap: $1.83 billion
Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ: CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.
Why Are We Cautious About CNXN?
- Muted 2.5% annual revenue growth over the last two years shows its demand lagged behind its business services peers
- Earnings per share lagged its peers over the last two years as they only grew by 6.9% annually
- Low free cash flow margin of 3.4% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Connection is trading at $70.57 per share, or 18x forward P/E. Read our free research report to see why you should think twice about including CNXN in your portfolio.
One Small-Cap Stock to Buy:
Grid Dynamics (GDYN)
Market Cap: $537.7 million
With engineering centers across the Americas, Europe, and India serving Fortune 1000 companies, Grid Dynamics (NASDAQ: GDYN) provides technology consulting, engineering, and analytics services to help large enterprises modernize their technology systems and business processes.
Why Should You Buy GDYN?
- Annual revenue growth of 15.3% over the last two years was superb and indicates its market share increased during this cycle
- Earnings per share grew by 20.4% annually over the last five years, massively outpacing its peers
- Returns on capital are increasing as management’s prior bets are starting to bear fruit
Grid Dynamics’s stock price of $5.63 implies a valuation ratio of 12.8x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
High-Quality Stocks for All Market Conditions
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.
