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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. Keeping that in mind, here is one small-cap stock that could amplify your portfolio’s returns and two that could be down big.

Two Small-Cap Stocks to Sell:

Semtech (SMTC)

Market Cap: $2.30 billion

A public company since the late 1960s, Semtech (NASDAQ:SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.

Why Should You Dump SMTC?

1. Persistent operating losses and eroding margin over the last five years point to its preference for growth over profits

2. Increased cash burn over the last five years raises questions about the return timeline for its investments

3. Negative returns on capital show that some of its growth strategies have backfired, and its shrinking returns suggest its past profit sources are losing steam

Semtech is trading at $27.52 per share, or 15.7x forward price-to-earnings. To fully understand why you should be careful with SMTC, check out our full research report (it’s free).

GMS (GMS)

Market Cap: $2.79 billion

Founded in 1971, GMS (NYSE:GMS) distributes specialty building materials including wallboard, ceilings, and insulation products, to the construction industry.

Why Are We Wary of GMS?

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. Forecasted revenue decline of 3.7% for the upcoming 12 months implies demand will fall off a cliff

3. Earnings per share have dipped by 13.3% annually over the past two years, which is concerning because stock prices follow EPS over the long term

At $73.35 per share, GMS trades at 9.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why GMS doesn’t pass our bar.

One Small-Cap Stock to Buy:

Graham Corporation (GHM)

Market Cap: $326.5 million

Founded when its founder patented a unique design for a vacuum system used in the sugar refining process, Graham (NYSE:GHM) provides vacuum and heat transfer equipment for the energy, petrochemical, refining, and chemical sectors.

Why Do We Love GHM?

1. Market share has increased this cycle as its 17% annual revenue growth over the last five years was exceptional

2. Earnings per share grew annually over the last two years, massively outpacing its peers

3. Free cash flow margin jumped by 5.6 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends