In the current environment, Wall Street has gravitated towards mega-cap technology stocks, while smaller companies remain overlooked. With economic uncertainty sparking risk-off sentiment more broadly, investors have piled into a narrow group of giant tech names viewed as safe havens. However, this has left many compelling small-cap stocks trading at highly-attractive valuations. Astute investors willing to look beyond large-cap darlings can uncover hidden gems perfectly-positioned for substantial gains once the macro climate improves.
Smaller companies tend to offer exceptional upside potential precisely because they fly under the radar. Without Wall Street research and media coverage, these stocks languish in obscurity. Their lower trading volumes also exacerbate price declines in sell-offs. That’s all despite the fact that many such companies have underlying businesses that may be growing rapidly and gaining market share. When risk appetite eventually returns, the upside in these neglected small caps could be enormous.
Recent market turmoil has discounted quality small companies to mouth-watering levels. Many now trade at just a fraction of sales, with sizable growth runways ahead. Their downtrodden prices assume severe economic distress rather than the fundamentals of the business. Savvy investors can capitalize on this disconnect to grab these winners at bargain-basement valuations.
Let’s dive into a few to keep an eye on right now.
Ammo Inc (POWW)
The ongoing war in Ukraine has led to a surge in demand for ammunition and defense products globally. Military allies are ramping up spending to replenish depleted inventories and prepare for extended conflict. This bodes well for ammunition manufacturers like Ammo Inc. (NASDAQ:POWW), which makes small-caliber rounds.
With a market capitalization under $240 million, Ammo Inc. offers substantial upside potential as demand for its core offering swells. The company produces 9mm, .223 caliber, and .308 caliber rounds, used primarily for the commercial market. It also makes specialty rounds for law enforcement and the military.
Ammo Inc.’s backlog has likely swelled to over $300 million as of September 2023. I say likely because it has stopped reporting its backlog for quite a while, and it last reported its backlog at $238 million. My best guess is that the company was forced to cease releasing backlog reports for national security reasons. However, the company’s management team has noted particular strength in orders of its higher-margin brass casings, expecting these orders to drive strong growth. Yet, the stock has languished due to the challenging environment for commodity ammunition sales.
Even then, shares have plunged nearly 80% from their 2021 peak of $9.30 to around $2 per share. This presents a compelling entry point for a business benefiting from surging global ammunition demand. The depressed stock price offers huge upside potential as backlogged orders drive rapid growth over the coming years.
With the Russia-Ukraine war dragging on, allies will likely continue ramping up arms production. As a smaller player, Ammo Inc. has much more room to run compared to the big defense contractors. With that in mind, once the company works through its restructuring to focus on its most profitable segments, margins and earnings should also expand rapidly. The sole recent Wall Street rating on the stock puts the price target at $3.00, implying 47% one-year upside potential.
Terran Orbital (LLAP)
This fledgling aerospace company went public via a SPAC merger in early 2022. Since then, the stock has disappointed. Shares trade for around $2.50, significantly below their $10 SPAC price.
However, Terran Orbital (NYSE:LLAP) has quietly built an enormous backlog, fueled by surging demand for satellite constellations. As of Q2, the company had a backlog of $2.6 billion, 80% of which it expects to convert into revenue by the end of 2025.
In spite of that, Terran Orbital’s market cap stands at just $200 million. Given the company’s mammoth backlog, this represents a compelling valuation, which could drive revenues to around $1 billion annually in 2024 and 2025. The company also has a healthy pipeline of over $20 billion in future opportunities.
Metrics aside, Terran Orbital has significantly expanded its manufacturing capacity with new production facilities coming online. This positions the company to work through its bulging backlog. Terran Orbital should see rapid growth in its financials as satellite orders turn into sales.
Major contract wins with customers like Lockheed Martin (NYSE:LMT) and the U.S. Space Development Agency validate the quality of Terran Orbital’s products. However, the market has overlooked this budding aerospace firm. Once the backlog conversion ramps up over the coming quarters, this stock’s upside could be enormous. In my view, LLAP stock provides a stellar opportunity to grab an emerging space leader at a bargain price. Another reason why I believe this is one of the top small-cap stocks to buy right now is because the consensus price target of $4.72 represents 314% upside potential over the next year.
CarParts.com (PRTS)
Overlooked opportunities also abound in the automotive aftermarket parts industry. Companies like CarParts.com (NASDAQ:PRTS) are benefiting from the rising average age of vehicles on U.S. roads.
The average age of cars has now eclipsed 12.5 years, an all-time high. As vehicles get older, repair and maintenance costs rise as well. This drives greater demand for aftermarket parts.
At the same time, deteriorating real wage growth means consumers are holding onto older vehicles longer rather than upgrading. Again, this fuels increased maintenance spending. CarParts.com sells replacement parts for a wide range of makes and models through its user-friendly website.
The company has delivered 14 consecutive quarters of revenue growth, including a slight increase in Q2 2023. However, earnings have declined year-over-year, as CarParts.com contended with higher transportation costs and parts shortages. Margin pressure also led to a stock decline of over 80% from 2021 highs.
Yet, with a forward price-to-sales ratio of just 0.35-times, CarParts.com trades at a deep discount to historical norms. Meanwhile, the powerful tailwinds of an aging vehicle fleet show no signs of abating. CarParts.com is poised to return to consistent growth and margin expansion as supply chain conditions improve.
This company’s depressed stock price provides investors with substantial upside potential as demand for aftermarket parts continues rising. CarParts.com’s growth story remains intact, with online sales penetration steadily increasing. This overlooked auto parts e-commerce play presents an attractive opportunity at current levels.
Additionally, I find no reason to worry about the company’s slow revenue growth right now. Analysts expect revenue growth to creep up from 3.6% this year to roughly 12.5% annually from 2025 to 2032. Earnings are also expected to deliver blockbuster growth during that timeframe. If we look at 2026 earnings, the forward price-earnings ratio for PRTS stock drops down to just 13.6-times. Slide that to 2032, and you are paying just 1.9-times forward earnings. Impressively, the one-year price target for PRTS stock sits at $10.40, representing 146.6% upside potential.
On the date of publication, Omor Ibne Ehsan 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.