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.

The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. That said, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.

Agilysys (AGYS)

Market Cap: $2.09 billion

Originally a subsidiary of Pioneer-Standard Electronics that distributed electronic components, Agilysys (NASDAQ:AGYS) offers a software-as-service platform that helps hotels, resorts, restaurants, and other hospitality businesses manage their operations and workflows.

Why Does AGYS Give Us Pause?

1. Gross margin of 62.7% reflects its relatively high servicing costs
2. Projected 4.7 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

Agilysys’s stock price of $75.36 implies a valuation ratio of 7x forward price-to-sales. Check out our free in-depth research report to learn more about why AGYS doesn’t pass our bar.

CTS (CTS)

Market Cap: $1.28 billion

With roots dating back to 1896 and a global manufacturing footprint, CTS (NYSE:CTS) designs and manufactures sensors, connectivity components, and actuators for aerospace, defense, industrial, medical, and transportation markets.

Why Do We Pass on CTS?

1. Annual sales declines of 6.3% for the past two years show its products and services struggled to connect with the market during this cycle
2. Modest revenue base of $515.8 million gives it less fixed cost leverage and fewer distribution channels than larger companies
3. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term

At $42.31 per share, CTS trades at 18.1x forward price-to-earnings. If you’re considering CTS for your portfolio, see our FREE research report to learn more.

Vontier (VNT)

Market Cap: $4.96 billion

A spin-off of a spin-off, Vontier (NYSE:VNT) provides electronic products and systems to the transportation, automotive, and manufacturing sectors.

Why Do We Think VNT Will Underperform?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Free cash flow margin dropped by 12.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Vontier is trading at $33.17 per share, or 10.6x forward price-to-earnings. To fully understand why you should be careful with VNT, check out our full research report (it’s free).

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