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 big thing and two that could be down big.
Two Small-Cap Stocks to Sell:
Pegasystems (PEGA)
Market Cap: $5.24 billion
With a "Center-out Business Architecture" approach that transcends organizational silos, Pegasystems (NASDAQ: PEGA) develops software that helps organizations automate workflows and use artificial intelligence to improve customer experiences and business processes.
Why Should You Sell PEGA?
- Offerings struggled to generate meaningful interest as its average billings growth of 3.6% over the last year did not impress
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 6.5 percentage points
Pegasystems is trading at $31.69 per share, or 2.9x forward price-to-sales. Check out our free in-depth research report to learn more about why PEGA doesn’t pass our bar.
Funko (FNKO)
Market Cap: $341 million
Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ: FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.
Why Is FNKO Risky?
- Lackluster 2% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Poor free cash flow margin of 0.6% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Returns on capital are increasing as management makes relatively better investment decisions
Funko’s stock price of $6.08 implies a valuation ratio of 55.8x forward P/E. Read our free research report to see why you should think twice about including FNKO in your portfolio.
One Small-Cap Stock to Watch:
Zurn Elkay (ZWS)
Market Cap: $8.34 billion
Claiming to have saved more than 30 billion gallons of water, Zurn Elkay (NYSE: ZWS) provides water management solutions to various industries.
Why Are We Fans of ZWS?
- Offerings and unique value proposition resonate with customers, as seen in its above-market 9.6% annual sales growth over the last five years
- Operating profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- ZWS is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its rising cash conversion increases its margin of safety
At $50.31 per share, Zurn Elkay trades at 26.1x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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.
Find out which 5 stocks it’s flagging this month — FREE. Get Our Top 5 Growth Stocks for Free HERE.
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.
