Investors are drawn to small-cap companies due to their inherently risky profiles compared to larger companies. Smaller companies have a greater potential to boom or bust. If an investor chooses wisely and purchases shares in a company that experiences massive growth and share price appreciation over an extended period while it is a small-cap company, it was a great decision. However, if an investor chooses a small-cap company that falters, the losses can be painful. It can be a risky game.
But diversification is the name of the game, and an investor shouldn’t be afraid to add small-cap companies – those with a market cap of $2 billion or less – to diversify a well-rounded portfolio.
When selecting these stocks, I chose multiple metrics to determine them as most undervalued, including their price-to-earnings ratio compared to other companies within their sectors and their historic average regarding share price and growth potential.
Here are some solid options for small-cap stocks. These equities have all experienced share price appreciation over the past year, but are still trading at an undervalued rating.
NewLake Capital Partners (NLCP)
NewLake Capital Partners (OTCMKTS:NLCP) is an industrial real estate investment trust, or REIT, that supplies real estate for the legally regulated cannabis industry. It owns various cultivation facilities and dispensaries, primarily with triple net leases, meaning that the tenants pay property tax, building upkeep, utilities and other costs.
Over this past year, its share price has increased by 59% due to rising investor sentiment surrounding its long-term potential.
REITs typically offer very high dividends compared to other industries. To be qualified as a REIT, a company must distribute at least 90% of its taxable income to investors, primarily in the form of dividends.
NewLake Capital offers investors a strong dividend yield of 8.3%. Its most recent quarterly payment was 41 cents per share, distributed on April 15.
Earnings for the first quarter issued May 9 included revenue of $12.6 million, up from $11.4 million a year ago. Income was $6.8 million and 33 cents per share, an improvement from $5.8 million and 27 cents per share a year ago. The company currently operates 31 properties located in 12 states.
NewLake Capital Partners has a forward P/E ratio of 17.2x, compared to similar companies within its sector, which have an average forward P/E ratio of 31.5x. NLCP also saw a significant share price drop since it started trading publicly back in 2021, but over the past year, it has begun to recover. This is mostly due to resolving its issues surrounding tenant delinquency, which could lead the stock to all-new highs.
Blue Bird (BLBD)
Blue Bird (NASDAQ:BLBD) manufactures and sells school buses. It also provides maintenance and parts services. It makes diesel, electric, and propane-fueled buses as well as other specialty models.
On May 8, Blue Bird announced its earnings for the second quarter, in which total revenue increased by 15% and net income rose more than threefold compared to the year before. Most notably, it raised the full-year outlook, in which revenue is estimated to be between $1.275 billion and $1.325 billion, with free cash flow in the range of $70 million to $80 million.
The positive report, which greatly exceeded analysts’ predictions, sent Blue Bird’s share price up 24% in a single day. Blue Bird’s share price is up 114% in the last 12 months.
Blue Bird is a solid company that offers investors very impressive earning growth. This has fueled its rapid ascent, which shows no sign of stopping.
Galiano Gold (GAU)
Galiano Gold (NYSEMKT:GAU) is an exploration company that owns and operates gold properties. Its flagship mine is located in Ghana, West Africa. In 2023, it mined more than 134,000 ounces of gold, which topped company estimates.
Galiano Gold reported earnings for the first quarter of $65.5 million and 31,840 ounces of mined gold. Net income was $14.5 million.
Over this past year, its share price has risen by approximately 217%. Gold has been recently trading at near an all-time high at roughly $2,350 per ounce. The large spike in gold futures caused a ripple effect among gold mining companies, and Galiano Gold is no different.
Galinao Gold is still trading at a decent valuation considering its large surge in share price. Its forward P/E ratio is currently 5.8x, while the median sector forward P/E is 16.5x, which makes the stock considerably undervalued.
Due to a deal with Gold Fields (NYSE:GFI), GAU is now a 90% stakeholder in its flagship mine location.
GAU is a great option for investors seeking smaller companies that are riding these growing gold prices.
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As of this writing, Noah Bolton 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 InvestorPlace.com Publishing Guidelines.
