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.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here is one small-cap stock that could be the next 100 bagger and two that could be down big.

Two Small-Cap Stocks to Sell:

Churchill Downs (CHDN)

Market Cap: $7.98 billion

Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ: CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.

Why Do We Think CHDN Will Underperform?

1. Sales trends were unexciting over the last two years as its 10.1% annual growth was below the typical consumer discretionary company
2. Poor free cash flow margin of 10.8% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Stagnant returns on capital show management has failed to improve the company’s business quality

Churchill Downs’s stock price of $114.45 implies a valuation ratio of 18.2x forward P/E. If you’re considering CHDN for your portfolio, see our FREE research report to learn more.

Kyndryl (KD)

Market Cap: $6.01 billion

Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl (NYSE: KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.

Why Does KD Worry Us?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 4.8% annually over the last five years
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.4% for the last five years
3. Negative returns on capital show that some of its growth strategies have backfired

Kyndryl is trading at $26.56 per share, or 7.7x forward P/E. Dive into our free research report to see why there are better opportunities than KD.

One Small-Cap Stock to Buy:

Napco (NSSC)

Market Cap: $1.47 billion

Protecting everything from schools to government facilities since 1969, Napco Security Technologies (NASDAQ: NSSC) manufactures electronic security devices, access control systems, and communication services for intrusion and fire alarm systems.

Why Is NSSC a Top Pick?

1. Market share has increased this cycle as its 13.7% annual revenue growth over the last five years was exceptional
2. NSSC is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its rising cash conversion increases its margin of safety
3. Rising returns on capital show management is finding more attractive investment opportunities

At $41.30 per share, Napco trades at 29.8x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.

High-Quality Stocks for All Market Conditions

Check out the high-quality names we’ve flagged in our Top 5 Strong Momentum Stocks for this week. 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-small-cap company Exlservice (+354% 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.