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.
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 is one small-cap stock that could be the next 100 bagger and two best left ignored.
Two Small-Cap Stocks to Sell:
RH (RH)
Market Cap: $3.01 billion
Formerly known as Restoration Hardware, RH (NYSE:RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.
Why Are We Cautious About RH?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Cash-burning history makes us doubt the long-term viability of its business model
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
RH’s stock price of $160.89 implies a valuation ratio of 15x forward P/E. If you’re considering RH for your portfolio, see our FREE research report to learn more.
Bright Horizons (BFAM)
Market Cap: $5.86 billion
Founded in 1986, Bright Horizons (NYSE:BFAM) is a global provider of child care, early education, and workforce support solutions.
Why Do We Pass on BFAM?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Free cash flow margin is expected to increase by 1.4 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Returns on capital are increasing as management makes relatively better investment decisions
Bright Horizons is trading at $103.70 per share, or 20.8x forward P/E. Dive into our free research report to see why there are better opportunities than BFAM.
One Small-Cap Stock to Buy:
Palomar Holdings (PLMR)
Market Cap: $3.24 billion
Founded in 2013 to fill gaps in catastrophe insurance markets, Palomar Holdings (NASDAQ:PLMR) is a specialty insurance provider that offers property and casualty insurance products in underserved markets, with a focus on earthquake coverage.
Why Will PLMR Beat the Market?
- Net premiums earned surged by 46.1% annually over the past two years, reflecting strong market share gains this cycle
- Impressive 39.5% annual book value per share growth over the last two years indicates it’s building equity value this cycle
- Book value per share outlook for the upcoming 12 months is outstanding and shows it’s on track to build significant equity value
At $122.38 per share, Palomar Holdings trades at 3.5x forward P/B. Is now a good time to buy? See for yourself in our full research report, it’s free for active Edge members.
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 5 Growth Stocks for this month. 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 for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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