It’s an obvious risk factor: overlooked small-cap stocks offer tremendous upside potential but in exchange for the likelihood of severe volatility. Imagine you’re a couch potato but you want to get fit as part of your new year’s resolution. You can make significant gains with relatively little effort because you’re starting from a low baseline.
However, the probability that you’ll commit to your resolution is slim. According to Drive Research, just 9% of adults keep their self-promises all year long. Moreover, 80% of such resolutions are forgotten by mid-winter. Alarmingly, many adults (23%) quit during the first week of the year. Wow.
And that’s kinda what you’re dealing with regarding small-cap stocks. Maybe some of them will become mid-capitalization firms, then graduate to the titans of industry. Or, in many if not most cases, they’ll go sideways and perhaps fade out.
In other words, no pain, no gain. If this kind of risk-reward profile is appealing to you, check out these tempting and overlooked small-cap stocks.
Ardmore Shipping (ASC)
A self-evident enterprise, Ardmore Shipping (NYSE:ASC) specifically focuses on shipping oil and chemicals. If we’re going to be honest, ASC incurred a wildly choppy year in 2023. However, sentiment has been picking up across the past few months. Analysts are giving it a shot, rating shares a consensus moderate buy with an $18.50 average price target. If it reaches, we’re talking upside of over 23%.
Now, it’s understandable that ASC has been shaky. Due to myriad nuances of the challenging economic backdrop of 2023, the oil sector did not perform well. Nevertheless, the world continues to run on hydrocarbons and may continue doing so for longer than people anticipate. Further, the latest jobs report – which came in better than expected – suggests that wider growth in commercial activities.
Basically, that should translate to increased demand for ASC, making it a candidate for overlooked small-cap stocks. It’s trading at a rock-bottom trailing-year multiple of 4.33X. Is that a value trap? Eh, when you consider the fundamentals and the half-year upswing of 22%, I think it may be a credible discount.
Adeia (ADEA)
Ah yes, Adeia (NASDAQ:ADEA) wants to confuse the snot out of prospective investors with its word salad. When you peruse its website, you’re greeted with the phrase, “Ideas are at the heart of Adeia.” What in the world does that mean? You can see why some overlooked small-cap stocks stay that way.
However, from what I can figure out, Adeia is a software specialist at heart. Specifically, it creates behavioral analytics algorithms that can help decipher what intrigues content consumers. It then licenses this technology to other enterprises so that they can maximize their customer experience (CX) offerings. Again, with the labor market running practically at full speed, demand for such analytics software could rise.
Analysts agree and are willing to endorse ADEA as a consensus moderate buy. Also, the average price target lands at $15, implying almost 24% upside from Friday’s closing price. While it might be one of the overlooked small-cap stocks, the company could be onto something. With the potentially improved economy, ADEA’s forward earnings multiple of 8.69X – a super-low figure – deserves consideration.
Dine Brands (DIN)
If you’re willing to plug your nose when it comes to overlooked small-cap stocks, you should check out Dine Brands (NYSE:DIN). Let me get this out of the way – it’s super risky. I’d use another word besides “super” but this is a family show. In the trailing one-year period, DIN got dinged almost 33%. Ouch. However, its three restaurant concepts – which include Applebee’s and IHOP – intrigue me.
Okay, the first criticism that comes to mind is the 52-week loss. Dine Brands doesn’t seem to resonate with consumers nor investors. Indeed, when you look at the revenue trend, you’re seeing a decline in growth. That’s not encouraging. However, it appears that DIN may have bottomed in November. As well, let’s consider the de-risked nature of the company.
According to Fortune Business Insights, the U.S. food service market may hit nearly $1.77 trillion by 2030. That would represent a compound annual growth rate (CAGR) of 10.03% from 2023. Of course, Dine Brands isn’t going to dominate this segment. But it just needs to grab an appropriate share. That combined with the hefty losses it took in 2023 makes it a possible candidate for upside in 2024.
Am I irrational? Actually, Wall Street analysts rate shares a consensus strong buy.
Carriage Services (CSV)
Not really a great topic to discuss when it comes to cheap small-cap stocks – well, not really a comforting topic in any circumstance, really – Carriage Services (NYSE:CSV) deals with finality. I don’t want to offend the SEO algorithm overlords in this overly sensitive ecosystem of ours. Let’s say that after some time (your mileage may vary), humans enter an extended sleeping session. Like, eternally, if you get my drift.
Americans love their euphemisms so if I want to get paid, I got to play. If you want hard data, the U.S. Census Bureau states that by 2030, all baby boomers will be age 65 or older. Now, the crux of the article deals with policies and what not. But if we’re investors of Carriage Services, you’re doing some math in your head.
Basically, that’s a lot of people that will be going night-night. And after several more years (hopefully), we’ll be joining them. Effectively, CSV isn’t just an example of your run-of-the-mill small-cap stocks. No, it’s permanently relevant; well, at least the narrative is. Analysts agree, pegging shares – surprise, surprise – a unanimous strong buy.
Orion (OEC)
An arguably 500 IQ idea among cheap small-cap stocks, Orion (NYSE:OEC) is a leading innovator in the specialty chemicals industry. It features a sustainability directive while offering myriad relevancies, undergirding the production of (electric vehicle) batteries, tires, and coating systems, among others. If I were to use colloquial language, it’s the poor man’s version of DuPont (NYSE:DD).
Now, before Orion apologists flood my inbox or X account with angry messages, let me be 100% clear: I don’t mean that in a pejorative sense. After all, everyone loves DD but we know you’re not getting DuPont for its capital gains potential. It moved up 6% in the past 52 weeks. In contrast, OEC gained nearly 34% during the same period.
Fundamentally, the prospect for an improved economy – thanks to the aforementioned jobs report – imply good things for Orion. As well, the focus on sustainability in manufacturing should be positive for the specialty chemicals firm. Analysts agree unanimously with a strong buy rating, along with a $35.67 average price target.
Talos Energy (TALO)
If you want to dip your toes into the speculative portion of the cheap small-cap stocks – as if the other ideas weren’t speculative enough – consider Talos Energy (NYSE:TALO). Focused on the exploration, development and production (upstream) components of the oil and natural gas value chain, Talos offers relevance. Of course, the previously mentioned economic challenges imposed cloudy weather on the industry.
However, the clouds particularly rained down on smaller enterprises. Admittedly, that’s a huge risk factor for Talos. Essentially, the oil and gas sector entered a consolidation cycle last year and it’s projected to rise in scope this year. Put another way, bigger companies are scooping up viable hydrocarbon projects. That’s good for the alpha dogs but maybe not so much for small-cap stocks in the hydrocarbon space.
Still, from a cynical perspective, TALO has been significantly de-risked from its public market debut in 2018. Therefore, it could attract takeover interest. Even without that factor, TALO has been slowly printing a series of rising lows since the 2020 doldrums.
If you take comfort in Wall Street assessments, know this: analyst peg shares a unanimous strong buy with a $20.75 price target, projecting over 51% upside.
VEON (VEON)
Easily one of the riskiest ideas I’ve proposed for cheap small-cap stocks, VEON (NASDAQ:VEON) bills itself as a global digital operator. It provides converged connectivity and digital services to several “dynamic” markets. What do I mean by dynamic? Basically, Russia. Now, for those that have apprehensions about this issue, Reuters reports that the company completed its exit from Russia in October last year.
Here’s the thing about VEON that makes it an intriguing idea. The mobile communications firm does business in countries that aren’t exactly on America’s radar. We’re talking places like Kazakhstan and Kyrgyzstan. Also, VEON has a significant presence in everyone’s favorite country Ukraine, via its Kyivstar brand. So, for those who like to invest in the greater good, VEON is available.
Still, the nagging question: why invest in such a potentially volatile enterprise? After all, that sub-3X price-earnings ratio seems like a value trap. Again, I want to reiterate that it’s a risky idea, as I declared to initiate this discussion.
Nevertheless, the region – which includes the former Soviet member states – may only have nowhere to go but up following Russia’s disastrous invasion of Ukraine. For VEON to work, we’re going to assume that Russia will undergo some kind of major political change. It’s high risk, high reward.
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.