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.
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 may have trouble.
Two Small-Cap Stocks to Sell:
NBT Bancorp (NBTB)
Market Cap: $2.33 billion
Tracing its roots back to 1856 when it first opened its doors in Norwich, New York, NBT Bancorp (NASDAQ:NBTB) is a community-oriented financial institution providing banking, wealth management, and insurance services to individuals and businesses across the northeastern United States.
Why Are We Wary of NBTB?
- 7.6% annual revenue growth over the last five years was slower than its banking peers
- Net interest income trends were unexciting over the last five years as its 8.6% annual growth was below the typical banking firm
- Performance over the past two years shows its incremental sales were less profitable, as its 1.8% annual earnings per share growth trailed its revenue gains
NBT Bancorp’s stock price of $44.50 implies a valuation ratio of 1.2x forward P/B. Dive into our free research report to see why there are better opportunities than NBTB.
PennyMac Financial Services (PFSI)
Market Cap: $6.88 billion
Founded during the 2008 financial crisis to help address the mortgage market meltdown, PennyMac Financial Services (NYSE:PFSI) is a specialty financial services company that originates, services, and manages investments related to residential mortgage loans in the United States.
Why Are We Cautious About PFSI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 6.9% annually over the last five years
- Annual net interest income growth of 7.1% over the last five years was below our standards for the banking sector
- Earnings per share have contracted by 4.7% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
PennyMac Financial Services is trading at $132.07 per share, or 1.5x forward P/B. Read our free research report to see why you should think twice about including PFSI in your portfolio.
One Small-Cap Stock to Watch:
Energy Recovery (ERII)
Market Cap: $765.4 million
Having saved far more than a trillion gallons of water, Energy Recovery (NASDAQ:ERII) provides energy recovery devices to the water treatment, oil and gas, and chemical processing sectors.
Why Are We Fans of ERII?
- Offerings are difficult to replicate at scale and result in a best-in-class gross margin of 67.6%
- Share buybacks catapulted its annual earnings per share growth to 42.6%, which outperformed its revenue gains over the last two years
- Free cash flow margin jumped by 6.3 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
At $14.43 per share, Energy Recovery trades at 16.6x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free for active Edge members.
High-Quality Stocks for All Market Conditions
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 6 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.