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.
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?
Sales trends were unexciting over the last three years as its 15.5% annual growth was below the typical software company
Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
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. Dive into our free research report to see why there are better opportunities than AI.
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?
Sales tumbled by 14.2% annually over the last two years, showing market trends are working against its favor during this cycle
Operating margin of 6.1% has deteriorated over the last five years, hampering its adaptability and competitive positioning
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, it’s free.
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?
Annual revenue growth of 19.6% over the last five years was superb and indicates its market share increased during this cycle
Additional sales over the last five years increased its profitability as the 25.9% annual growth in its earnings per share outpaced its revenue
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
Story Continues