The 3 Most Undervalued Small-Cap Stocks to Buy Now: August 2023

Josh Enomoto

Thu, Aug 17, 2023, 7:34 PM 4 min read

At the core of the discussion, investors seeking undervalued small-cap stocks do so for one main reason: to maximize their return potential. Of course, such a directive inherently carries risks. Basically, less-proven enterprises often run on little else than a compelling narrative feature with very low predictability. But in exchange for this dubious profile, moonshots may be on the horizon.

Fundamentally, another reason to consider small-cap stocks centers on the targeting of hidden gems. For example, you can buy a sector leader like Apple (NASDAQ:AAPL) right now. However, if you had a time machine, you’d rather acquire AAPL when it was trading for pennies in the 1980s. Back then, few could have imagined the success the consumer technology giant would command.

Also, the benefit to acquiring undervalued small-cap stocks is that the crowd has likely not jumped on board yet. This framework gives you a chance to build a strong position so that if a mass wave of enthusiasm materializes, you’d be one of the top beneficiaries.

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Again, though, it must be emphasized: companies with diminutive market capitalization tend to fail more often than succeed. If you’re okay with this reality, below are small-cap stocks to buy now.

Small-Cap Stocks: Ichor (ICHR)

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Billed as an expert in critical systems engineering and manufacturing, Ichor (NASDAQ:ICHR) might not be a household name. However, it’s one of the quietly relevant enterprises that feed pertinent infrastructures. From semiconductor capital equipment to turnkey solutions for original equipment manufacturers (OEMs) to integrated outsourced systems, Ichor lays the groundwork for its many enterprise-level clients.

So far this year, ICHR has been on a respectable run, gaining a bit over 25% since the Jan. opener. However, in the trailing one-year period, shares faded by 6%. Nevertheless, the company’s wide relevance makes it one of the top small-cap stocks to consider.

Financially, Ichor prints a solid three-year revenue growth rate (per-share basis) of 17.5%, beating out 63.9% of its semiconductor peers. Nevertheless, ICHR trades at only 0.9X sales, comparing favorably to the sector median of 2.67x. Finally, Wall Street analysts peg ICHR as a consensus moderate buy with an average price target of $40.67, implying 22% upside potential.

Stem (STEM)

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A wildly risky example of undervalued small-cap stocks, Stem (NYSE:STEM) on paper appears a viable opportunity. Marketing itself as a global leader in artificial intelligence-driven clean energy solutions and services, Stem specializes in multiple businesses. These include energy storage facilities and electric vehicle charging management systems. Through its Athena AI-based platform, Stem enables its clients to unlock flexibility across the clean energy value chain.

Scientifically, Stem hits all the right notes. Unfortunately, the market has been skeptical. Since the beginning of this year, STEM stock dropped nearly 35% of equity value. In the past 365 days, shares plunged more than 63%.

At the same time, Stem commands an extremely high-growth enterprise, featuring a three-year revenue growth rate of 86.3%. That beats out 97.28% of its peers. Still, shares only trade at 2.07x sales, which is contextually decent given the top-line expansion. Lastly, analysts peg STEM as a moderate buy with an average price target of $9.69, implying almost 76% upside potential.

Oatly (OTLY)

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Priced at only a few cents above a buck, investors have more stable choices than Swedish food company Oatly (NASDAQ:OTLY). At the same time, for those seeking small-cap stocks to buy now, it’s difficult to turn your eyes away from OTLY if you’re the speculating type. Specializing in sustainable alternatives to dairy products Oatly aligns with the sensibilities of the modern young consumer.

I don’t think anyone will dispute that last sentence. However, OTLY is undeniably risky, dropping over 34% of equity value since the Jan. opener. Over the trailing one-year period, shares sank 65%, posing obvious worries about forward viability.

Still, when it comes to the actual product, Oatly scores highly. Apparently, the company’s vegan ice cream is exceptionally delectable. And while it suffers troubled financials, Oatly prints a three-year revenue growth rate of 52.4%. Even with that, the market prices OTLY at a sales multiple of only 1.04X, below 63% of its peers. In closing, analysts peg OTLY as a moderate buy with an average price target of $3.36, implying nearly 155% upside.

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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.