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. 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:

Strategic Education (STRA)

Market Cap: $1.94 billion

Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ:STRA) is a career-focused higher education provider.

Why Do We Avoid STRA?

1. Number of domestic students has disappointed over the past two years, indicating weak demand for its offerings
2. Earnings per share fell by 6.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Strategic Education is trading at $79.90 per share, or 14.2x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than STRA.

Elanco (ELAN)

Market Cap: $5.16 billion

Originally established as a division of pharmaceutical giant Eli Lilly before becoming independent in 2018, Elanco Animal Health (NYSE:ELAN) develops and sells medications, vaccines, and other health products for pets and farm animals across more than 90 countries.

Why Does ELAN Worry Us?

1. Weak constant currency growth over the past two years indicates challenges in maintaining its market share
2. Earnings per share fell by 3.1% annually over the last five years while its revenue grew, partly because it diluted shareholders
3. Negative returns on capital show that some of its growth strategies have backfired

Elanco’s stock price of $10.43 implies a valuation ratio of 11.9x forward price-to-earnings. To fully understand why you should be careful with ELAN, check out our full research report (it’s free).

One Small-Cap Stock to Buy:

Federal Signal (FSS)

Market Cap: $4.72 billion

Developing sirens that warned of air raid attacks or fallout during the Cold War, Federal Signal (NYSE:FSS) provides safety and emergency equipment for government agencies, municipalities, and industrial companies.

Why Is FSS a Good Business?

1. Backlog has averaged 14.4% growth over the past two years, showing it has a pipeline of unfulfilled orders that will support revenue in the future
2. Operating profits and efficiency rose over the last five years as it benefited from some fixed cost leverage
3. Earnings per share have massively outperformed its peers over the last two years, increasing by 30.5% annually

At $77.18 per share, Federal Signal trades at 20.8x forward price-to-earnings. Is now the time to initiate a position? See for yourself in our full research report, it’s free.

Stocks We Like Even More

The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.

Take advantage of the rebound by checking out our Top 5 Growth Stocks for this month. 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 Axon (+711% five-year return). Find your next big winner with StockStory today for free.