Generally speaking, you want to keep your portfolio tied largely to blue-chip stocks. However, on occasion, your portfolio should also include cheap small-cap stocks. Granted, small-cap stock ideas feature plenty of risk. But investors can enjoy tremendous upside potential, assuming, of course, the narrative pans out successfully.
In many if not most cases, diminutive firms tend to fade out relative to organizations with established businesses. As well, the recent volatility in the market should reaffirm investors’ focus on blue chips. Quite frankly, these stalwarts own resources to weather multiple economic storms. On the other hand, cheap small-cap stocks to buy feature a questionable outlook.
Again, though, your decision on navigating more treacherous names depends on your risk tolerance and what you’re looking for. If you see intense profitability potential in a tight timeframe, the blue chips probably won’t get you what you want. And that’s where the below small-cap stocks to buy present enticing prospects.
Arguably not a household name, Photronics (NASDAQ:PLAB) is one of the top small-cap stocks to buy. One of its specialties centers on photomasking, which is a unique process used in photolithography and for the production of integrated circuits. Another area of expertise is flat panel display production, which effectively represents the “last mile” for computer technologies.
Following the close of the Oct. 6 session, Photronics carried a market capitalization of $997 million. On a year-to-date basis, PLAB stock slipped more than 16%. At the same time, it’s performing much better than the Nasdaq Composite index, which fell 30% during the same period. Thus, the market respects the underlying company’s everyday relevance to the tech sector.
Now, why PLAB belongs on this list of cheap small-cap stocks is that it’s almost criminally underrated. According to Gurufocus.com, Photronics’ business rates as modestly undervalued. Where to start? It features a very stable balance sheet with a strong cash-to-debt ratio. It also commands a double-digit three-year revenue growth rate while also delivering solid profitability metrics.
Yet it’s priced below 9.7 times trailing earnings. This is easily one of the cheap small-cap stocks you shouldn’t ignore.
One of the perilous ideas among the already riskier-than-average cheap small-cap stocks to buy, Stratasys (NASDAQ:SSYS) may appeal to gamblers with a longer-term outlook. Specializing in industrial 3D printing, Stratasys provides complete polymer 3D printing solutions for every stage of the product life cycle, across design, manufacturing, and healthcare.
Following the conclusion of the Oct. 6 session, the company featured a market cap of $985 million. Since the start of the year, SSYS shares fell slightly more than 41%, reflecting tremendous volatility. However, circumstances stabilized somewhat in the trailing month. And over the past five days, SSYS managed to swing higher to the tune of 4%.
If you’re into smart speculation, Stratasys may have something for you. Gurufocus.com labels SSYS modestly undervalued. As with many ambitious tech firms, its profitability metrics aren’t great. Neither are sales trends, if I’m being honest. However, Stratasys does enjoy decent stability in the balance sheet. Primarily, its cash-to-debt ratio stands at nearly 36 times. In contrast, the underlying industry’s median stat rates at only 1.3 times.
American bioscience firm, Orthopediatrics (NASDAQ:KIDS) engages in designing, developing, manufacturing and distributing orthopedic implants and instruments for pediatric issues. As its ticker symbol indicates, the company offers an array of products geared for children. From trauma to medical conditions, Orthopediatrics helps society’s most vulnerable. Therefore, it receives a bonus for being a feel-good story.
Upon the ringing of the closing bell on Oct. 6, the bioscience company commanded a market cap of $963 million. On paper, circumstances don’t look swell, with KIDS stock shedding more than 24% of equity value since the beginning of this year. However, since May 11, KIDS gained over 19%, suggesting some folks see the potential here.
For prospective investors, Orthopediatrics represents a work in progress among cheap small-cap stocks. Presently, Gurufocus.com labels the business modestly undervalued. Unfortunately, its profitability and growth metrics could use significant improvement. That said, the company’s three-year EBITDA growth rate stands at 24.9%, better than 66% of its peers. Most notably, Orthopediatrics enjoys a decent balance sheet, affording it some stability for the long haul.
Azz Inc (AZZ)
Another small-cap stock to consider is Azz Inc (NYSE:AZZ). AZZ specializes in serving the needs of critical infrastructure. Per its website, it represents North America’s largest hot-dip galvanizer of fabricated steel.
You might be wondering, why is galvanization important? According to NationalMaterial.com, “Galvanized steel is very protective, including sharp corners and recesses that couldn’t be protected with other coatings, making it resistant to damage.” In other words, the process helps prevent premature rust and corrosion. That’s going to be crucial as the Biden administration plans to build back better.
Currently, Azz features a market cap of over $971 million. Since the start of 2022, AZZ is down almost 30%. However, this might represent a discount for contrarian investors seeking cheap small-cap stocks to buy.
Right now, Gurufocus.com labels AZZ modestly undervalued. The issue with the underlying firm is that its financial strength and growth metrics ping a hair below average. However, the company enjoys robust profitability, particularly its operating margin of 12.2%. As a result, it’s priced 11.4 times trailing earnings, whereas the industry median stat is nearly 19 times.
Varex Imaging (VREX)
Another intriguing market idea among cheap small-cap stocks to buy, Varex Imaging (NASDAQ:VREX) specializes in imaging solutions. According to its website, Varex Imaging is the world’s largest independent supplier and manufacturer of X-ray imaging components and related processing solutions. Moreover, the company enjoys a long track record, leveraging 75 years of corporate experience.
Presently, Varex features a market cap of a little over $877 million. Since the January opener, VREX slipped 31%, not an unusual performance among cheap small-cap stocks. However, circumstances did stabilize more recently. For example, in the trailing six months, VREX gained slightly over 2%.
Right now, Gurufocus.com labels Varex’s business as modestly undervalued. Here, the softness stems from middling strength in the balance sheet. As well, its growth-based statistics could use some shoring up if we’re being honest.
At the same time, Varex does enjoy decent profitability metrics, including a 10.5% operating margin that rates better than nearly 64% of the competition. Most notably, VREX’s forward price-earnings ratio stands at 18.5 times. In contrast, the industry median is 23 times.
Douglas Dynamics (PLOW)
Perhaps an oddity on this list of cheap small-cap stocks to buy, Douglas Dynamics (NYSE:PLOW) is a manufacturer and upfitter of commercial work truck attachments and equipment. By this, we’re primarily talking about the snow plows that trucks use to move snow away from roads.
If you think about it, Mother Nature brings on the snow (in certain regions) irrespective of economic conditions. Thus, in some ways, Douglas Dynamics offers an excellent idea for recession-resistant investment opportunities. As of the Oct. 6 session, the company features a market cap of $660 million. Since the start of the year, PLOW slipped 27%.
Per Gurufocus.com, PLOW is significantly undervalued. Therefore, prospective buyers should expect some risk here, let’s be real about this. It has an okay balance sheet though it could use improvement in the growth department.
However, Douglas Dynamics makes up for some of these concerns with decent profitability. Most notably, the company features return on equity of 13.9%, far higher than the industry median 5.5%.
Malibu Boats (MBUU)
An American manufacturer of recreational boats, Malibu Boats (NASDAQ:MBUU) is one of the more controversial ideas on this list of cheap small-cap stocks to buy. Fundamentally, it’s tone deaf in a way to discuss recreational boating amid global recession fears. Moreover, with the consumer economy weakening broadly, MBUU seems unusually risky.
At the same time, Malibu Boats could be surprisingly relevant. After all, who are the ones that benefitted the most from the coronavirus pandemic (financially speaking)? The affluent, as you can see from the expanding wealth gap. Therefore, those with money have serious money.
Following the Oct. 6 session’s conclusion, MBUU featured a market cap of $979 million. Since the start of the year, the stock fell 31%.
Gurufocus.com labels MBUU significantly undervalued. Here’s the thing: Malibu Boats features strengths across the board. For instance, its debt-to-EBITDA ratio is 0.51, far lower than the industry median of 2.7 times. Its three-year revenue growth rate stands at 21%, rated higher than 91% of its peers. As well, net margin pings at 13%, exceeding the 2.9% industry median.
Yet the company’s forward P/E ratio sits at under 6 times. For the gambler, MBUU is a compelling idea among cheap small-cap stocks to buy.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.