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.

These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. That said, 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:

Lithia (LAD)

Market Cap: $8.42 billion

With a strong presence in the Western US, Lithia Motors (NYSE: LAD) sells a wide range of vehicles, including new and used cars, trucks, SUVs, and luxury vehicles from various manufacturers.

Why Are We Cautious About LAD?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Gross margin of 15.9% is below its competitors, leaving less money for marketing and promotions
3. High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $322.09 per share, Lithia trades at 9.1x forward P/E. Read our free research report to see why you should think twice about including LAD in your portfolio.

Arcos Dorados (ARCO)

Market Cap: $1.59 billion

Translating to “Golden Arches” in Spanish, Arcos Dorados (NYSE: ARCO) is the master franchisee of the McDonald's brand in Latin America and the Caribbean, responsible for its operations and growth in over 20 countries.

Why Are We Hesitant About ARCO?

1. Lacking pricing power results in an inferior gross margin of 13.2% that must be offset by turning more tables
2. Operating margin of 6.9% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
3. Low free cash flow margin of -0.9% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

Arcos Dorados is trading at $7.65 per share, or 0.3x forward price-to-sales. To fully understand why you should be careful with ARCO, check out our full research report (it’s free).

One Small-Cap Stock to Watch:

Semrush (SEMR)

Market Cap: $1.60 billion

Started by Oleg Shchegolev while still in university, Semrush (NYSE: SEMR) is a software-as-a-service platform that helps companies optimize their search engine and content marketing efforts.

Why Are We Positive On SEMR?

1. Winning new contracts that can potentially increase in value as its billings growth has averaged 24.8% over the last year
2. Projected revenue growth of 18.6% for the next 12 months suggests its momentum from the last three years will persist
3. Superior software functionality and low servicing costs result in a stellar gross margin of 82.1%

Semrush’s stock price of $10.70 implies a valuation ratio of 3.4x forward price-to-sales. Is now a good time to buy? See for yourself in our full research report, it’s free.

High-Quality Stocks for All Market Conditions

Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.

While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 176% over the last five years.

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 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.