Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.

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 big thing and two that could be down big.

Two Small-Cap Stocks to Sell:

RH (RH)

Market Cap: $2.88 billion

Formerly known as Restoration Hardware, RH (NYSE:RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.

Why Does RH Give Us Pause?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations

2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 14.5% annually

3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

RH is trading at $155 per share, or 12.3x forward price-to-earnings. If you’re considering RH for your portfolio, see our FREE research report to learn more .

Werner (WERN)

Market Cap: $1.69 billion

Conducting business in over a 100 countries, Werner (NASDAQ:WERN) offers full-truckload, less-than-truckload, and intermodal delivery services.

Why Are We Out on WERN?

1. Sales tumbled by 4% annually over the last two years, showing market trends are working against its favor during this cycle

2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 26% annually while its revenue grew

3. Diminishing returns on capital suggest its earlier profit pools are drying up

Werner’s stock price of $27.45 implies a valuation ratio of 22.5x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than WERN .

One Small-Cap Stock to Buy:

Magnite (MGNI)

Market Cap: $1.42 billion

Born from the 2020 merger of Rubicon Project and Telaria, Magnite (NASDAQ:MGNI) operates the world's largest independent sell-side advertising platform that automates the buying and selling of digital advertising inventory across all channels and formats.

Why Should You Buy MGNI?

1. Annual revenue growth of 33.7% over the last five years was superb and indicates its market share increased during this cycle

2. Incremental sales significantly boosted profitability as its annual earnings per share growth of 77.3% over the last five years outstripped its revenue performance

3. Robust free cash flow margin of 24.8% gives it many options for capital deployment, and its improved cash conversion implies it’s becoming a less capital-intensive business