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 may have trouble.

Two Small-Cap Stocks to Sell:

C3.ai (AI)

Market Cap: $2.27 billion

Named after the three Cs of its original focus—carbon, cloud computing, and customer relationship management—C3.ai (NYSE: AI) provides enterprise AI software that helps organizations develop, deploy, and operate large-scale artificial intelligence applications across various industries.

Why Do We Think AI Will Underperform?

1. Sales trends were unexciting over the last three years as its 15.5% annual growth was below the typical software company
2. Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
3. Persistent operating margin losses suggest the business manages its expenses poorly

C3.ai’s stock price of $16.90 implies a valuation ratio of 5.4x forward price-to-sales. To fully understand why you should be careful with AI, check out our full research report (it’s free).

Allegro MicroSystems (ALGM)

Market Cap: $5.71 billion

The result of a spinoff from Sanken in Japan, Allegro MicroSystems (NASDAQ: ALGM) is a designer of power management chips and distance sensors used in electric vehicles and data centers.

Why Are We Out on ALGM?

1. Sales tumbled by 14.2% annually over the last two years, showing market trends are working against its favor during this cycle
2. Operating margin of 6.1% has deteriorated over the last five years, hampering its adaptability and competitive positioning
3. Earnings per share fell by 17.2% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable

Allegro MicroSystems is trading at $30.54 per share, or 51x forward P/E. Read our free research report to see why you should think twice about including ALGM in your portfolio.

One Small-Cap Stock to Buy:

CSW (CSW)

Market Cap: $4.32 billion

With over two centuries of combined operations manufacturing and supplying, CSW (NASDAQ: CSW) offers special chemicals, coatings, sealants, and lubricants for various industries.

Why Are We Bullish on CSW?

1. Annual revenue growth of 19.6% over the last five years was superb and indicates its market share increased during this cycle
2. Additional sales over the last five years increased its profitability as the 25.9% annual growth in its earnings per share outpaced its revenue
3. Strong free cash flow margin of 15.5% enables it to reinvest or return capital consistently, and its recently improved profitability means it has even more resources to invest or distribute

At $257.40 per share, CSW trades at 25.8x 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

Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.

The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today

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