1 Small-Cap Stock with Competitive Advantages and 2 We Avoid

Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.

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:

Sotera Health Company (SHC)

Market Cap: $4.68 billion

With a critical role in ensuring the safety of millions of patients worldwide, Sotera Health (NASDAQGS:SHC) provides sterilization services, lab testing, and advisory services to ensure medical devices, pharmaceuticals, and food products are safe for use.

Why Are We Wary of SHC?

1. 5.3% annual revenue growth over the last two years was slower than its healthcare peers
2. Revenue base of $1.16 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
3. Flat earnings per share over the last four years lagged its peers

Sotera Health Company is trading at $16.47 per share, or 16.8x forward P/E. If you’re considering SHC for your portfolio, see our FREE research report to learn more.

Cathay General Bancorp (CATY)

Market Cap: $3.52 billion

Founded in 1962 with its first branch in Los Angeles' Chinatown, Cathay General Bancorp (NASDAQ:CATY) operates Cathay Bank, providing commercial banking services to businesses and individuals with a strong presence in Asian-American communities.

Why Do We Think Twice About CATY?

1. Sales were flat over the last two years, indicating it’s failed to expand this cycle
2. Muted 6.1% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
3. Sales over the last two years were less profitable as its earnings per share fell by 4.8% annually while its revenue was flat

At $52.48 per share, Cathay General Bancorp trades at 1.1x forward P/B. Read our free research report to see why you should think twice about including CATY in your portfolio.

One Small-Cap Stock to Watch:

e.l.f. Beauty (ELF)

Market Cap: $5.59 billion

Short for "eyes, lips, face", e.l.f. Beauty (NYSE:ELF) is a developer of high-quality beauty products at accessible price points.

Why Does ELF Catch Our Eye?

1. Remarkable 45.2% revenue growth over the last three years demonstrates its ability to capture significant market share
2. Earnings growth has massively outpaced its peers over the last three years as its EPS has compounded at 38.2% annually
3. Free cash flow margin increased by 12.2 percentage points over the last year, giving the company more capital to invest or return to shareholders

e.l.f. Beauty’s stock price of $94.00 implies a valuation ratio of 28.3x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.

Stocks We Like Even More

Your portfolio can’t afford to be based on yesterday’s story. The risk in a handful of heavily crowded stocks is rising daily.

The names generating the next wave of massive growth are right here in our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).

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-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.