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. 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:
Alarm.com (ALRM)
Market Cap: $2.16 billion
Processing over 325 billion data points annually from more than 150 million connected devices, Alarm.com (NASDAQ: ALRM) provides cloud-based platforms that enable residential and commercial property owners to remotely monitor and control their security, video, energy, and other connected devices.
Why Is ALRM Risky?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 7.2% underwhelmed
- Estimated sales growth of 4.9% for the next 12 months implies demand will slow from its two-year trend
- Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient
Alarm.com’s stock price of $43.54 implies a valuation ratio of 2.4x forward price-to-sales. Read our free research report to see why you should think twice about including ALRM in your portfolio.
Westamerica Bancorporation (WABC)
Market Cap: $1.24 billion
Founded in 1884 and serving communities from Mendocino County in the north to Kern County in the south, Westamerica Bancorporation (NASDAQ: WABC) provides banking services to individuals and small businesses throughout Northern and Central California.
Why Are We Out on WABC?
- Net interest income trends were unexciting over the last five years as its 5.9% annual growth was below the typical banking firm
- Net interest margin dropped by 48.9 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
Westamerica Bancorporation is trading at $51.28 per share, or 1.3x forward P/B. Check out our free in-depth research report to learn more about why WABC doesn’t pass our bar.
One Small-Cap Stock to Buy:
Shift4 (FOUR)
Market Cap: $4.27 billion
Starting as a payment gateway provider in 1999 and now processing over $200 billion in annual payment volume, Shift4 Payments (NYSE: FOUR) provides integrated payment processing solutions and software that help businesses accept and manage transactions across in-store, online, and mobile channels.
Why Will FOUR Outperform?
- Market share has increased this cycle as its 27.7% annual revenue growth over the last two years was exceptional
- Performance over the past two years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 36.1% outpaced its revenue gains
- Stellar return on equity showcases management’s ability to surface highly profitable business ventures
At $52.78 per share, Shift4 trades at 7.9x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
Stocks We Like Even More
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662%. AppLovin before it ran 753%. Nvidia before it ran 1,178%. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
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.
