7 Cheap Small-Cap Stocks to Buy Before the Next Breakout

With the end of the year fast approaching, investors that don’t mind speculating a bit might want to consider cheap small-cap stocks to buy. Primarily, the volatility this year facilitated significant discounts in compelling market ideas. And while investors should focus the bulk of their attention on established blue-chip enterprises, the small market capitalization plays bring enticement.

Mathematically, the law of small numbers means cheap small-cap stocks to buy don’t require much “energy” to move higher. Of course, market dynamics apply in both directions, so investors must be careful. Still, with a little bit of money (relatively speaking), market participants can potentially enjoy outsized gains.

Another factor to consider is seasonality. For some folks, participating in winter holiday events invigorates positive emotions. Some of that could play into the equities sector; hence phenomena like the Santa Claus rally. Therefore, if you want to do some speculating before we call it a day on 2022, these are the cheap small-cap stocks to buy.

Cheap Small-Cap Stocks: DRDGold (DRD)

Based in resource-rich South Africa, DRDGold (NYSE:DRD) represents a gold producer as its corporate name suggest. As well, the company specializes in the recovery of the metal from the retreatment of surface tailings. Currently, DRDGold commands a market capitalization of $604.8 million. On a year-to-date basis, DRD dropped 14% of equity value.

Fundamentally, the Federal Reserve’s commitment to attacking soaring inflation through raising the benchmark interest rate hurts the underlying commodity. In addition, other global central banks have the same idea: raise rates to control inflation. Interestingly, though, DRD gained more than 11% in the trailing month. At least some of this enthusiasm could be due to the fear trade as instability concerns ring out.

Further, DRD might be one of the cheap small-cap stocks to buy before the next breakout because of its value proposition. The company enjoys excellent strength in the balance sheet, solid revenue growth and strong profit margins. Yet DRD’s price-earnings-growth (PEG) ratio is only 0.18 times, well below the industry median of 0.84 times.

Epsilon Energy (EPSN)

Headquartered in Houston, Texas, Epsilon Energy (NASDAQ:EPSN) represents an independent oil and natural gas firm specializing in on-shore projects. Presently, Epsilon features a market cap of $151.1 million. Shares gained more than 14% YTD, although they did dip recently. In the trailing month, EPSN fell more than 11%.

To be fair, hydrocarbon-related enterprises face geopolitical headwinds. The oil price cap that western powers imposed to stifle Russia’s war of aggression may lead to unknown dynamics. However, analysts at JPMorgan recently made a bullish case for the underlying industry, according to the Wall Street Journal. Therefore, I’m inclined to consider EPSN. Not only does it represent one of the cheap small-cap stocks to buy, it can also break out because of this fundamental catalyst.

Further, Epsilon Energy enjoys a zero-debt balance sheet, strong revenue growth and outstanding profit margins. Its return on equity stands at 40.5%, meaning it enjoys superior conversion of equity financing into profits. For all this, the market prices EPSN at 4.6 times trailing-12-month (TTM) earnings. It might be a steal among cheap small-cap stocks to buy.

Cheap Small-Cap Stocks: PrimeEnergy Resources (PNRG)

Headquartered in Stamford, Connecticut, PrimeEnergy Resources (NASDAQ:PNRG) is an independent hydrocarbon firm specializing in acquiring, developing and producing oil and natural gas. At the moment, PrimeEnergy carries a market cap of $156.2 million. Since the beginning of this year, PNRG shares gained a bit over 14%.

PrimeEnergy may be ready for prime time, making it one of the cheap small-cap stocks to buy before a potential breakout. Again, JPMorgan’s bullishness toward the sector drives confidence in the lesser-known enterprise. In particular, with China coming out of its coronavirus-related restrictions, the demand profile from the world’s second-largest economy – combined with other emerging markets – can override recessionary pressures in the west.

Most importantly, based on the stated theme of cheap small-cap stocks to buy, PNRG is undervalued. Right now, the market prices shares at 4.9 times TTM earnings. In contrast, the industry median is 8.2 times.

FutureFuel (FF)

Headquartered in Clayton, Missouri, FutureFuel (NYSE:FF) is a developer and producer of chemicals and biofuels. Currently, FutureFuel carries a market cap of $359.3 million. Shares gained more than 7% since the January opener, leading to a price tag of $8.39. In the trailing five sessions, it’s down 5%.

Still, FF makes for an intriguing case for cheap small-cap stocks to buy ahead of a breakout. Primarily, investors should recognize its massive war chest. Its cash-to-debt ratio stands at 525 times, beating out more than 91% of its peers. In addition, its equity-to-asset ratio is 0.82 times, ranking above 86% of sector players. As well, its Altman Z-Score pings at 5.5, reflecting very low bankruptcy risk.

To be fair, FutureFuel carries an aspirational profile. However, its biofuels business might gain traction in the years ahead. Both institutions and entire countries are seeking alternatives to traditional hydrocarbons because of geopolitical dependency issues.

Finally, note its Shiller price-to-earnings (P/E) ratio sits at less than 7 times. In contrast, the sector median value is 20.2 times.

Cheap Small-Cap Stocks: Intrepid Potash (IPI)

Based in Denver, Colorado, Intrepid Potash (NYSE:IPI) is a fertilizer manufacturer. According to its corporate profile, the company  is the largest producer of potassium chloride, also known as muriate of potash, in the U.S. At time of writing, Intrepid features a market cap of $455 million. Since the start of the year, IPI dropped more than 24% of equity value.

Unfortunately for shareholders, even in the trailing month, shares slipped 11%. Thus, IPI couldn’t manage to ride coattails of recent broader market momentum. More critically, with Russia’s invasion of Ukraine sparking a global food crisis, the outlook for the fertilizer sector remains questionable. Still, from a cynical perspective, IPI will likely swing higher based on sheer necessity. So, it’s quite possible IPI ranks among the best cheap small-cap stocks to buy.

What should add some confidence for prospective investors is that Intrepid enjoys a strong balance sheet. For instance, its cash-to-debt ratio is 25.6 times, better than nearly 88% of the competition. Further, the market prices IPI at 1.6 times trailing earnings, below the sector median of 13.9 times.

Envela (ELA)

One of the more intriguing ideas among cheap small-cap stocks to buy before a breakout, Envela (NYSEAMERICAN:ELA) bills itself as a re-commerce company. Per its website, re-commerce, or reverse commerce, is the process of reselling previously owned products as whole goods or recycling items’ components and materials for reuse.

Further, the company states re-commerce represents the foundation of the circular economy – a system aimed at eliminating waste and driving the continued reuse of existing resources. Naturally, Envela enjoys relevancies based on the environmental, social and governance (ESG) movement.

Currently, the company features a market cap of $148.4 million. To be fair, ELA has already gained more than 34% since the beginning of the year. However, it’s down roughly 35% since the closing peak of 2022. Thus, some additional room for upside may exist.

Further, the market prices ELA at 12.2 times trailing earnings. In contrast, the sector median stands at 15.4 times.

Cheap Small-Cap Stocks: Amtech Systems (ASYS)

Headquartered in Tempe, Arizona, Amtech Systems (NASDAQ:ASYS) is a global supplier of semiconductor equipment and consumables to the power semiconductor industry. Per its website, Amtech’s chips are integrated in systems all around us, such as mobile, computing, industrial, automotive, telecom and medical applications.

At present, Amtech commands a market cap of $121.1 million, making it one of the smaller enterprises among cheap small-cap stocks to buy. Since the January opener, ASYS dropped 11.5% of equity value, reflecting the troubles associated with the semiconductor industry. Challenges such as global supply chain disruptions dog the tech sector. Still, Amtech’s broad relevancies could spark big moves in 2023.

Notably, the company enjoys a strong balance sheet, characterized by a better-than-average cash-to-debt ratio. As well, its Altman Z-Score hits 3.81, reflecting low risk for bankruptcy. Finally, the market prices ASYS at just under 7 times trailing earnings. In contrast, the sector median stands at 17.3 times.

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.

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