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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. 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:

Roku (ROKU)

Market Cap: $9.03 billion

Spun out from Netflix, Roku (NASDAQ: ROKU) makes hardware players that offer access to various online streaming TV services.

Why Do We Think Twice About ROKU?

1. Focus on expanding its platform came at the expense of monetization as its average revenue per user fell by 1.4% annually

2. Expenses have increased as a percentage of revenue over the last few years as its EBITDA margin fell by 7.1 percentage points

3. Performance over the past three years shows its incremental sales were much less profitable, as its earnings per share fell by 34.6% annually

Roku’s stock price of $61.51 implies a valuation ratio of 24.7x forward EV/EBITDA. To fully understand why you should be careful with ROKU, check out our full research report (it’s free).

Quanex (NX)

Market Cap: $855 million

Starting in the seamless tube industry, Quanex (NYSE:NX) manufactures building products like window, door, kitchen, and bath cabinet components.

Why Does NX Worry Us?

1. Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 4.6 percentage points

2. Incremental sales over the last two years were much less profitable as its earnings per share fell by 6.9% annually while its revenue grew

3. Free cash flow margin shrank by 6.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

Quanex is trading at $18.20 per share, or 7.1x forward P/E. Dive into our free research report to see why there are better opportunities than NX.

One Small-Cap Stock to Watch:

Procore (PCOR)

Market Cap: $9.67 billion

Used to manage the multi-year expansion of the Panama Canal that began in 2007, Procore (NYSE:PCOR) offers a software-as-service project, finance, and quality management platform for the construction industry.

Why Do We Like PCOR?

1. ARR trends over the last year show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability

2. Software is difficult to replicate at scale and leads to a premier gross margin of 81.2%

3. Free cash flow margin is expected to increase by 5.8 percentage points next year, suggesting the company will have more capital to invest or return to shareholders