1 Small-Cap Stock with Exciting Potential and 2 We Find Risky

Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here is one small-cap stock that could amplify your portfolio’s returns and two best left ignored.

Two Small-Cap Stocks to Sell:

Smith & Wesson (SWBI)

Market Cap: $522.8 million

With a history dating back to 1852, Smith & Wesson (NASDAQ:SWBI) is a firearms manufacturer known for its handguns and rifles.

Why Do We Steer Clear of SWBI?

1. Sales tumbled by 10.2% annually over the last five years, showing consumer trends are working against its favor
2. Poor free cash flow margin of 2.1% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

At $11.65 per share, Smith & Wesson trades at 42x forward P/E. Read our free research report to see why you should think twice about including SWBI in your portfolio.

Hertz (HTZ)

Market Cap: $1.57 billion

Started with a dozen Model T Fords, Hertz (NASDAQ:HTZ) is a global car rental company providing vehicle rental services to leisure and business travelers.

Why Do We Avoid HTZ?

1. Declining unit sales over the past two years imply it may need to invest in improvements to get back on track
2. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
3. High net-debt-to-EBITDA ratio of 9× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Hertz’s stock price of $5.07 implies a valuation ratio of 96.7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why HTZ doesn’t pass our bar.

One Small-Cap Stock to Buy:

DXP (DXPE)

Market Cap: $2.33 billion

Founded during the emergence of Big Oil in Texas, DXP (NASDAQ:DXPE) provides pumps, valves, and other industrial components.

Why Is DXPE a Good Business?

1. Annual revenue growth of 13% over the past five years was outstanding, reflecting market share gains this cycle
2. Operating margin expanded by 5.1 percentage points over the last five years as it scaled and became more efficient
3. Share repurchases have amplified shareholder returns as its annual earnings per share growth of 27.4% exceeded its revenue gains over the last two years

DXP is trading at $148.55 per share, or 24x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.

High-Quality Stocks for All Market Conditions

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