Although larger companies provide greater stability for investors due to their established businesses, cheap small-cap stocks to buy offer tremendous upside potential. To be fair, this potential comes at a cost in terms of higher risk. However, many investors set aside a small portion of their portfolio for speculation. These discounted market ideas may provide a possible spark.

Generally speaking, cheap small-cap stocks to buy tend to be underweight because of their aspirational profile. In other words, the predictability of their business trajectory features many ambiguities, thus leading to volatility risks. At the same time, greater ambiguities tend to offer greater upside should circumstances align favorably.

For the purposes of this discussion, I’m indebted to Gurufocus, an investment resource that provides financial breakdowns of public companies. Here, the focus centers on cheap small-cap stocks to buy based on fundamental discounts. So, without further ado, let’s take a look at the flyweights of the equities sector.

Cheap Small-Cap Stocks: GoPro (GPRO)

Synonymous with the action camera industry, GoPro (NASDAQ:GPRO) helps content creators capture some of the most distinct perspectives. From thrill-seeking excursions to even military combat footage, GoPro both entertains and enlightens the world. Presently, the company features a market capitalization of $844 million.

According to Gurufocus, GPRO rates as “modestly undervalued” based on both the investment resource’s propriety calculations and traditional metrics. For example, GPRO features a forward price-to-earnings (P/E) ratio of under 5 times. In contrast, the underlying industry median stands at nearly 13 times.

Moreover, GoPro is a surprisingly high-quality business. Its return on equity stands at nearly 72%. This rates better than over 99% of companies tied to the hardware industry. In addition, the company features a net margin of 31.7%, ranking above 97% of its peers.

Finally, GoPro enjoys a solid balance sheet, with a cash-to-debt ratio of 1.7 times. In comparison, the industry median is 1.25 times. Therefore, GPRO represents an underappreciated gem among cheap small-cap stocks to buy.

Alpha and Omega Semiconductor (AOSL)

Headquartered in Sunnyvale, California, Alpha and Omega Semiconductor (NASDAQ:AOSL) focuses on advanced innovations in the power semiconductor industry. Per its website, the company’s product portfolio targets several industries, including “flat panel TVs, LED lighting, smart phones, battery packs, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment.”

Currently, AOSL features a market cap of a little over $843 million. Priced at a few cents higher than $30 at time of writing, AOSL suffered from the tech sector rout. On a year-to-date (YTD) basis, AOSL shed almost 51% of equity value. Nevertheless, those interested in speculating on cheap small-cap stocks to buy should put AOSL on their radar.

Per Gurufocus, AOSL is “modestly undervalued” and its current P/E ratio sits at a low 1.9 times. In contrast, the median P/E for the underlying industry is nearly 15 times. Of course, a low P/E doesn’t mean much in and of itself.

Fundamentally, investors should consider AOSL for its robust balance sheet, highlighted by a debt-to-EBITDA ratio that ranks better than more than 84% of its peers. As well, the company enjoys excellent growth trajectories and solid overall profitability metrics.

Cheap Small-Cap Stocks: Photronics (PLAB)

A specialty tech firm, Photronics (NASDAQ:PLAB) focuses on photomask products and services. Per its website, it’s the worldwide leader in the space, with applications in mainstream nodes, integrated circuits and flat panel displays. Currently, the company features a market cap of $958 million. Since the start of this year, PLAB dropped 21% of market value, representing a relative discount on the charts.

According to Gurufocus, Photronics features a “modestly undervalued” business. Prospective investors of cheap small-cap stocks to buy should note its resilient balance sheet. Most notably, the company commands a cash-to-debt ratio of 6.64 times. This stat ranks higher than 66% of the semiconductor industry.

On top of that, Photronics enjoys strong growth trajectories. For example, its three-year revenue growth rate stands at 14.4%, better than almost 66% of its peers. On the profitability side, PLAB’s operating margin stands at 23%. In contrast, the industry median is only 11.3%. Since not many folks appear to appreciate PLAB, you should seriously consider adding it to your list of cheap small-cap stocks to buy.

Netgear (NTGR)

Based in San Jose, California, Netgear (NASDAQ:NTGR) is an American computer networking firm. Per its corporate profile, it produces networking hardware for consumers, businesses and service providers. The company operates in three business segments: retail, commercial, and as a service provider.

Presently, Netgear carries a market cap of nearly $596 million. Since the start of the year, NTGR dropped almost 31% of equity value. Intriguingly, though, since hitting an apparent bottom on June 13 of this year, NTGR gained more than 16%. Therefore, it’s one of the cheap small-cap stocks to buy that’s presently on the move.

Per Gurufocus, the investment resource rates Netgear as “modestly undervalued” based largely on its proprietary calculations. Against traditional metrics, it’s notable that NTGR’s price-to-sales (P/S) ratio pings at 0.63, favorably below the industry median of 1.17.

Prominently, though, Netgear enjoys a stout three-year free cash flow growth rate of nearly 49%. This ranks higher than nearly 85% of the hardware industry. As well, the company enjoys a solid balance sheet, highlighted by a cash-to-debt ratio of 5.74 times.

Cheap Small-Cap Stocks: Ceva (CEVA)

Headquartered in Rockville, Maryland, Ceva (NASDAQ:CEVA) plies its trade in the semiconductor industry. Specifically, per its website, the company licenses signal processing platforms, AI processors, sensor fusion software and modules. It also offers chip design services to chip manufacturers and original equipment manufacturers, or OEMs.

Presently, Ceva commands a market cap of nearly $605 million. Shares trade hands for about $26 a pop. Since the beginning of this year, CEVA gave up 43% of equity value, drawing some speculators’ attention. However, it’s in the financials where the underlying firm makes its best case for cheap small-cap stocks to buy.

According to Gurufocus, CEVA rates as “significantly undervalued” and prominently enjoys a stout balance sheet. For example, its cash-to-debt ratio stands at a meteoric 20 times, higher than nearly 76% of its peers. Conversely, its debt-to-equity ratio sits at a low 0.03 times, favorably below 85% of the industry.

As well, the company features decent strengths in key growth and profitability stats. Therefore, it may be a hidden gem among cheap small-cap stocks to buy.

Red Violet (RDVT)

An analytics firm, Red Violet (NASDAQ:RDVT) transforms data into intelligence, in a fast and efficient manner, so that its clients can spend their time on what matters most, according to its website. While enterprises have cut back on their expenditures this year due to several macroeconomic headwinds, Red Violet offers relevance because big data represents a viable pathway to competitive success.

Of course, Wall Street doesn’t quite see it that way at the moment. Since the beginning of this year, RDVT hemorrhaged nearly 58% of equity value. Presently, the underlying firm features a market cap of $228 million. While it’s one of the smaller of the cheap small-cap stocks to buy, it brings plenty to the table.

According to Gurufocus, RDVT rates as “significantly undervalued,” and it’s important for prospective investors not to overlook its balance sheet stability. For instance, Red Violet features a whopping cash-to-debt ratio of 20 times, higher than nearly 71% of its peers. Also, the company enjoys a three-year revenue growth rate of 27.4%, better than 84% of the industry.

Cheap Small-Cap Stocks: Luna Innovations (LUNA)

Headquartered in Roanoke, Virginia, Luna Innovations (NASDAQ:LUNA) is an American developer and manufacturer of fiber-optics- and terahertz-based technology products for the aerospace, automotive, communications, defense, energy, infrastructure, security and silicon photonics industries, per its corporate profile. Therefore, it’s well worth a look among cheap small-cap stocks to buy for its broad footprint.

Currently, Luna features a market cap of $152 million, making it a rather small play. Since the start of the year, LUNA stock dropped 45% of equity value. While its losses on the charts invariably brings out the speculators, more conservative-leaning investors can also depend on quality fundamentals.

Per Gurufocus, LUNA rates as a “significantly undervalued” investment. Most prominently, the underlying firm features a three-year revenue growth rate of nearly 28%. This ranks better than 92% of its peers. On the bottom line, Luna enjoys a net margin of 9.8%, better than 76% of the industry.

Finally, the company features an overall quality profile, with a return on equity of nearly 11%.

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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.