1 Small-Cap Stock You Should Watch and 2 Encountering Difficulties

Uncovering Opportunities in Small-Cap Stocks

Small-cap stocks often fly under the radar of major financial analysts, making them a fertile ground for investors seeking undervalued opportunities. However, this segment of the market comes with significant risks and rewards, as reliable analyst guidance is often lacking.

At StockStory, our goal is to help you maximize gains and minimize losses by identifying promising companies and steering clear of potential pitfalls. Below, we highlight one small-cap stock with strong upside potential, as well as two that may be headed for trouble.

Two Small-Cap Stocks to Consider Selling

Churchill Downs (CHDN)

Market Capitalization: $7.98 billion

Churchill Downs (NASDAQ: CHDN) is best known for the Kentucky Derby and operates a range of businesses in horse racing, online betting, and gaming across the United States.

Reasons for a Cautious Outlook on CHDN:

• Over the past two years, sales growth averaged just 10.1% annually, trailing behind the broader consumer discretionary sector.
• The company’s free cash flow margin has been a modest 10.8%, limiting its ability to reinvest, repurchase shares, or distribute dividends.
• Returns on capital have remained flat, indicating that management has not succeeded in enhancing operational efficiency or business quality.

Currently trading at $114.45 per share, Churchill Downs has a forward price-to-earnings ratio of 18.2.

Kyndryl (KD)

Market Capitalization: $6.01 billion

Spun off from IBM in 2021, Kyndryl (NYSE: KD) is the world’s largest provider of IT infrastructure services, supporting enterprise clients with the design, construction, and management of complex technology environments.

Concerns About KD:

• Revenue has declined by an average of 4.8% per year over the past five years, as customers have delayed purchases.
• With a free cash flow margin of -0.4% over the same period, Kyndryl has limited capacity to invest in growth or return capital to shareholders.
• Negative returns on capital suggest that some of the company’s expansion strategies have not delivered the desired results.

Kyndryl shares are priced at $26.56, representing a forward P/E of 7.7.

One Small-Cap Stock Worth Considering

Napco Security Technologies (NSSC)

Market Capitalization: $1.47 billion

Since 1969, Napco Security Technologies (NASDAQ: NSSC) has been a leader in manufacturing electronic security products, access control solutions, and communication services for fire and intrusion alarm systems, serving clients from schools to government agencies.

Why NSSC Stands Out:

• Napco has captured greater market share, with an impressive 13.7% annual revenue growth over the past five years.
• The company generates robust free cash flow, providing flexibility to invest in new initiatives or return value to shareholders. Its improving cash conversion rate adds a layer of financial security.
• Increasing returns on capital indicate that management is successfully identifying and executing on attractive investment opportunities.

Napco is currently valued at $41.30 per share, with a forward P/E of 29.8. Is this the right moment to invest?

Top-Quality Stocks for Any Market Environment

Discover our curated selection of Top 5 Strong Momentum Stocks for this week. These high-quality picks have delivered a remarkable 244% return over the past five years (as of June 30, 2025).

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