There are clear signs of a reversal rally after a meaningful correction last year for equities. The S&P 500 index has trended higher by over 15% for the first half of the year. With a decline in recession probability, the rally for the index is likely to sustain. There also seems to be clarity that rate hikes are nearing an end. Given the positive momentum, it’s a good time to increase the portfolio risk exposure and consider some small-cap stocks.
Of course, the focus should be entirely on fundamentally strong businesses supported by positive industry tailwinds. It’s not a good time to consider speculative exposure. That’s particularly true when fundamentally attractive small-cap stocks are poised for a meaningful rally in the next two to three years.
Let’s discuss three small-cap stocks that look undervalued with positive business triggers.
EVgo (EVGO)
After a meaningful correction last year, EVgo (NASDAQ:EVGO) stock has been in a consolidation mode. I believe a breakout on the upside is imminent based on industry tailwinds and the company’s growth momentum.
A recent report by Wood Mackenzie indicates that EV charging ports in the U.S. will increase four-fold by 2027. EVgo is among the companies best positioned to benefit. Currently, the business has 3,100 DC fast-charging stalls in operation or under construction. Further, approximately 3,500 stalls are in the active engineering pipeline. Therefore, the company is poised for robust revenue growth in the coming years.
For Q1 2023, EVgo reported 229% revenue growth to $25.3 million. It’s also worth noting that the company’s gross margin expanded by 800 basis points on a year-on-year basis. With operating leverage and recurring revenue, margin improvement is likely to sustain. With the best part of growth still to come, EVGO stock looks attractively valued.
Adecoagro (AGRO)
Adecoagro (NYSE:AGRO) stock has witnessed positive momentum, with a rally of 28% for the year. Strong fundamental developments back the rally. However, the 3.45% dividend yield remains attractive at a forward price-earnings ratio of 15.9.
A big reason to be bullish on Adecoagro is the company’s farming business. Currently, the main business includes sugar, ethanol, dairy, rice, and other crops. With food shortage, there is a strong case for higher realization and EBITDA margin expansion. For Q1 2023, the company reported an adjusted EBITDA of $89.2 million and a margin of 36.4%.
Another point to note is that Adecoagro has reported positive free cash flows (FCF) in the last three years. As FCF accelerates, dividend growth is likely to be robust. I am optimistic as the company has witnessed sustained growth in agricultural produce and total area under farming management.
Borr Drilling (BORR)
Borr Drilling (NYSE:BORR) stock has surged almost 100% in the last 12 months. However, the provider of offshore drilling rigs remains undervalued at a forward price-earnings ratio of 14.4. I expect BORR stock to remain in an uptrend.
The first reason to be bullish is clear revenue visibility. As of Q1 2023, the company reported an order backlog of $1.64 billion. It’s worth noting that the strong order intake in 2022 was at a higher day rate. Therefore, Borr is positioned for significant EBITDA margin expansion in 2023 and beyond.
To put things into perspective, the company expects year-on-year revenue growth of about 71% to perhaps $760 million. For the same period, EBITDA growth is guided at 141%. In all probability, crude has bottomed out, and if the order intake trend remains bullish, Borr is positioned for robust free cash flow generation. That will likely translate into improved credit metrics and higher flexibility for possible fleet expansion.
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 InvestorPlace.com Publishing Guidelines.