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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.

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. Keeping that in mind, here is one small-cap stock that could be the next big thing and two best left ignored.

Two Small-Cap Stocks to Sell:

E.W. Scripps (SSP)

Market Cap: $204.4 million

Founded as a chain of daily newspapers, E.W. Scripps (NASDAQ:SSP) is a diversified media enterprise operating a range of local television stations, national networks, and digital media platforms.

Why Do We Avoid SSP?

1. Muted 1.2% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers

2. Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 8.2 percentage points over the next year

3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

E.W. Scripps is trading at $2.33 per share, or 0.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SSP in your portfolio, it’s free.

Huntington Ingalls (HII)

Market Cap: $9.03 billion

Building Nimitz-class aircraft carriers used in active service, Huntington Ingalls (NYSE:HII) develops marine vessels and their mission systems and maintenance services.

Why Do We Pass on HII?

1. Average backlog growth of 1.8% over the past two years was mediocre and suggests fewer customers signed long-term contracts

2. Free cash flow margin shrank by 9.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

3. Eroding returns on capital suggest its historical profit centers are aging

At $218.90 per share, Huntington Ingalls trades at 16.2x forward P/E. To fully understand why you should be careful with HII, check out our full research report (it’s free).

One Small-Cap Stock to Watch:

Watts Water Technologies (WTS)

Market Cap: $8.15 billion

Founded in 1874, Watts Water (NYSE:WTS) specializes in manufacturing water products and systems for residential, commercial, and industrial applications globally.

Why Do We Watch WTS?

1. Superior product capabilities and pricing power result in a stellar gross margin of 45%

2. Operating margin expanded by 4.5 percentage points over the last five years as it scaled and became more efficient

3. Share repurchases over the last five years enabled its annual earnings per share growth of 16.9% to outpace its revenue gains