Friday, December 8, 2023
Stocks To Buy

The 7 Most Undervalued Small-Cap Stocks to Buy in September 2023

I believe that it’s a good time to accumulate some undervalued small-cap stocks.

The S&P 500 index should have a sustained rally next year. Monetary policy tightening is almost done and the news is discounted in the markets.

The United States economy has also evaded a potential recession. If we curb further inflation, GDP growth is likely to surprise on the upside.

The market rally begins with blue-chip or index stocks. However, if the rally sustains, growth stocks join the party. I see this scenario panning out next year. Selected growth stocks have already skyrocketed.

This column discusses seven undervalued small-cap stocks to buy. I believe these stocks represent companies with strong fundamentals and an optimistic growth outlook. In the long-term, there can be multiple multi-bagger names that emerge from this list of small-cap stocks.

Solid Power (SLDP)

Solid Power (NASDAQ:SLDP) stock looks deeply undervalued after a correction of 67% in the last 12 months.

While potential commercialization of solid-state batteries is still few years away, SLDP stock is likely to trend higher on positive business developments.

The first point to note is that the company has a strong backing of automotive partners that include Ford (NYSE:F) and BMW (OTCMKTS:BMWYY). Solid Power has licensed its manufacturing technology to BMW for parallel research and development activities.

In 2023, the company began large-scale production of EV cells. Solid Power is on track to deliver A-sample EV cells to automotive partners for validation testing. This is likely to be an important step towards battery commercialization.

I must add that as of Q2 2023, the company reported a strong liquidity buffer of $443 million. I don’t see the need for equity dilution in the next 12 to 18 months. With these positives, SLDP stock looks attractive and is a potential multi-bagger.

Riot Platforms (RIOT)

With Bitcoin (BTC-USD) trending lower from the highs of the year, there has been a deep correction in crypto stocks. This seems like a good opportunity to accumulate fundamentally strong small-cap stocks from the crypto space. Riot Platforms (NASDAQ:RIOT) is possibly the best bet among Bitcoin miners.

The first point to note is that Bitcoin halving is due in 2024. Probably the digital asset will surge higher in the coming quarters. Specific to Riot Platforms, there are two big positives.

First, the company is debt free and reported a liquidity buffer (including digital assets) of $510 million as of Q2 2023. This provides Riot with high financial flexibility.

Further, Riot has undertaken an aggressive mining capacity expansion plan. To put things into perspective, the company reported capacity of 10.7EH/s as of Q2 2023. The target is to boost capacity to 20.1EH/s by Q2 2024 and further to 35.4EH/s in 2025. With big growth plans, Riot is positioned to create value.

Cronos (CRON)

Among cannabis small-cap stocks, Cronos (NASDAQ:CRON) looks like an interesting bet. CRON stock is massively undervalued and even after a rally of 42% in the last. I believe that the upside is likely to sustain.

Cronos currently commands a market valuation of $854 million. As of Q2 2023, the company reported $841 million in cash and equivalents. This puts into perspective the extent of undervaluation.

The company has high financial flexibility to pursue aggressive expansion in a federal level cannabis legalization scenario.

Of course, that’s not the only positive. Cronos is focused on cost cutting, and it’s likely that operating cash flows will turn positive in the coming quarters. It’s also worth mentioning here that Cronos had received “unsolicited indications of interest” in July. Any potential merger and acquisition announcement can be a stock upside catalyst. Overall, I expect CRON stock to deliver multibagger returns from current levels.

EHang Holdings (EH)

EHang Holdings (NASDAQ:EH) is another attractive name among undervalued small-cap stocks to buy for multi-bagger returns.

EH stock has surged by 160% in the last 12 months. However, valuations remain attractive with the company making big strides towards growth in a big addressable market.

As an overview, EHang operates as an autonomous aerial vehicle technology platform company. Last month, the company’s unmanned aircraft cloud system was approved by the Civil Aviation Administration of China for trial operations. This marks a big step towards commercialization.

It’s also worth noting that as of July, the company had conducted more than 39,000 demo and trial flights. Therefore, EHang is targeting a big addressable market with wide applications and once approvals start coming, growth is likely to be robust.

The company has already received inquiries for use of aerial vehicles in tourism, urban transportation, emergency rescue, and smart city management, among others.

ChargePoint Holdings (CHPT)

ChargePoint Holdings (NYSE:CHPT) has been in a sharp downtrend in the last few quarters. The stock seems undervalued after the plunge and is worth accumulating at current levels of $5.8.

I must mention that CHPT stock has a short interest that’s currently at 22.9% of the free-float. I would not be surprised if there is a massive short squeeze rally.

From the industry perspective, there is significant headroom for growth in the EV charging industry. ChargePoint has strong presence in the United States and an expanding presence in Europe (operating in 16 countries). The wide addressable market will ensure that the company remains in a high growth trajectory.

Another important point to note is that the company’s initial revenue from a charging point relates to hardware revenue. However, over seven years, unit economics indicate that 46% revenue is recurring.

The key point here is that as the number of charging stations installed swells, recurring revenue will increase. This is likely to have a positive impact on the EBITDA margin.

Piedmont Lithium (PLL)

Piedmont Lithium (NASDAQ:PLL) seems like another massively undervalued small-cap stock. The lithium mining stock has remained sideways for year-to-date and I believe a breakout is likely after consolidation.

Talking about the undervaluation, Piedmont Lithium commands a valuation of $844 million. As compared to this, two assets (100% ownership), Carolina and Tennessee, have a combined net present value of $5 billion.

Besides this, Piedmont also has assets in Quebec and Ghana. Clearly, the market valuation seems depressed, and it’s a good buying opportunity.

There are two other important catalysts for PLL stock upside. First, shipments from the company’s Quebec project have commenced and as revenue flows, the stock will trend higher. Further, Piedmont has received final permit to advance construction at the Tennessee project.

I also don’t see any financing concerns. Recently, a Ghana sovereign fund announced a fund infusion of $27.9 million for the company’s Ewoyaa project. Given the outlook for lithium, finding partners for financing and development is unlikely to be a concern.

Borr Drilling (BORR)

Borr Drilling (NYSE:BORR) stock has been in an uptrend with a rally of 62% in the last 12 months. I however believe that the offshore drilling services provider remains undervalued considering the growth outlook.

As an overview, Borr currently has 23 contracted jack-up fleet with two under construction. The fleet has an average age of six years. The important point to note is that Borr reported an order backlog of $1.83 billion as of Q2 2023. The backlog provides clear revenue and cash flow visibility.

To put things into perspective, Borr Drilling expects to deliver base case EBITDA of $571 million for 2024. EBITDA is expected to increase to $687 million and $779 million in 2025 and 2026 respectively. In a bullish case scenario (higher day rate for rigs), the company expects 2026 EBITDA at $941 million.

Considering the impending growth, I believe that the stock is undervalued. It’s worth noting that as cash flows swell, Borr will be positioned to deleverage and potentially expand its fleet.

On the date of publication, Faisal Humayun did not hold (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 Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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