1 Small-Cap Stock with Competitive Advantages and 2 to Be Wary Of

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 100 bagger and two that could be down big.

Two Small-Cap Stocks to Sell:

Simpson (SSD)

Market Cap: $6.29 billion

Aiming to build safer and stronger buildings, Simpson (NYSE:SSD) designs and manufactures structural connectors, anchors, and other construction products.

Why Do We Think Twice About SSD?

1. Annual revenue growth of 2.7% over the last two years was below our standards for the industrials sector
2. Free cash flow margin shrank by 5.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Simpson is trading at $149.83 per share, or 18.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why SSD doesn’t pass our bar.

U.S. Cellular (USM)

Market Cap: $5.61 billion

Operating as a majority-owned subsidiary of Telephone and Data Systems since its founding in 1983, US Cellular (NYSE:USM) is a regional wireless telecommunications provider serving 4.6 million customers across 21 states with mobile phone, internet, and IoT services.

Why Should You Dump USM?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.3% annually over the last five years
2. Earnings per share have dipped by 18.4% annually over the past five years, which is concerning because stock prices follow EPS over the long term
3. ROIC of 1.2% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam

U.S. Cellular’s stock price of $65.74 implies a valuation ratio of 5.7x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including USM in your portfolio.

One Small-Cap Stock to Watch:

Herc (HRI)

Market Cap: $3.27 billion

Formerly a subsidiary of Hertz Corporation and with a logo that still bears some similarities to its former parent, Herc Holdings (NYSE:HRI) provides equipment rental and related services to a wide range of industries.

Why Does HRI Stand Out?

1. Annual revenue growth of 14.1% over the past two years was outstanding, reflecting market share gains this cycle
2. Healthy operating margin of 18.8% shows it’s a well-run company with efficient processes, and its profits increased over the last five years as it scaled
3. Share repurchases have amplified shareholder returns as its annual earnings per share growth of 32.7% exceeded its revenue gains over the last five years

At $116.59 per share, Herc trades at 7.6x forward price-to-earnings. Is now the right time to buy? Find out in our full research report, it’s free.

Stocks We Like Even More

Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.

While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking 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 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.