An upbeat job market, and the Fed’s announcement that it will now begin tapering its asset-purchase program based on its confidence that the economy is now able to handle persistent issues on its own, have been fueling the stock market’s rally. Consequently, most large-cap stocks are currently trading at lofty valuations.

However, rising inflation, supply-chain logjams, reduced production, and an expanded trade deficit are worrying to investors regarding a potential market correction as a result. Because high-priced stocks could suffer a pullback if there is a market correction in the near term, we think micro-cap stocks from relatively stable industries could be smart bets now. Indeed, the iShares Micro-Cap ETF (IWC) has gained 8.9% over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) 6.4% returns, indicating investors’ interest in micro-cap stocks given the support from the continuing low-interest-rate environment.

We believe undervalued micro-cap stocks Lee Enterprises, Incorporated (LEE), Friedman Industries, Incorporated (FRD), Lifeway Foods, Inc. (LWAY), and Educational Development Corporation (EDUC) are well-positioned to gain substantially in the coming months. Each of these stocks is rated ‘Strong Buy’ in our proprietary POWR Ratings system.

Lee Enterprises, Incorporated (LEE)

With a market cap of $121.49 million, LEE is a media company that publishes weekly, classified, specialty publications, and offers commercial printing services and  online services, including websites supporting its daily newspapers and other publications. It also provides advertising and digital marketing services to SMBs and distributes third-party publications. LEE is headquartered in Davenport, Iowa.

On October 19, 2021, LEE partnered with Mudd Advertising, a leading full-service automotive advertising agency, to leverage a customized version of LEE’s Vision platform, a proprietary sales enablement and execution software, to support Mudd’s cross-channel marketing efforts for  retail automotive dealers and manufacturers. With this, both companies are looking forward to witnessing significant demand from automotive advertisers.

On July 27, 2021, LEE joined Amazon.com, Inc.’s (AMZN) Amazon Advertising to offer OTT services to more than 35,000 local business advertisers. Combining AMZN’s compelling presence in the OTT space, LEE’s strong sales culture, deep connections to local advertisers, and its full-service national agency, Amplified, should help both companies expand their  market reach and generate better returns in the coming months.

For its fiscal third quarter, ended June 27, 2021, LEE’s total operating revenue increased 7.6% year-over-year to $196.49 million. The company’s operating income came in at $13.78 million, indicating a 17.3% year-over-year improvement. Its net income was  $3.74 million for the quarter, compared to a $727,000 net loss in the prior-year period. Its EPS came in at $0.55, versus a $0.23 loss per share in the year-ago period. The company had $21.07 million in cash and cash equivalents as of June 27, 2021. Over the past year, the stock has gained 139.7% in price and closed Friday’s trading session at $20.90.

LEE’s 0.15x trailing-12-month Price/Sales is 91.9% lower than the 1.81x industry average. In terms of trailing-12-month EV/EBITDA, LEE is currently trading at 6.45x, which is 41% lower than the 10.93x industry average.

LEE’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an A grade for Value and Momentum, and a B grade for Quality. Click here to see the additional ratings for LEE’s Growth, Stability, and Sentiment.

Of the 10 stocks in the A-rated Entertainment – Publishing industry, LEE is ranked #2.

Friedman Industries, Incorporated (FRD)

Humble, Tex.-based FDR engages in steel processing, pipe manufacturing and processing, and in the U.S steel and pipe distribution businesses. The company operates through two segments–Coil and Tubular. Its products and services are sold to steel distributors and customers that manufacture steel buildings, railroad cars, barges, tanks and containers, trailers, parts, and other fabricated steel products. It has a $97.84 million market capitalization.

On May 25, 2021, in a strategic co-location with Steel Dynamics, Inc. (STLD), FRD announced  plans to develop a new facility in Sinton, Texas, to help FRD capture additional demand growth and freight efficiencies with an expanded portfolio and geographic advantages. Expected to commence operations in April 2022, the mill will be the most advanced electric arc furnace mini-mill globally and has an estimated annual capacity of 3 million tons with a flat roll. This should  help the company to serve a broader customer base.

FRD’s net sales for its fiscal first quarter ended June 30, 2021, came in at $65.92 million, representing a 180.2% rise from the prior-year period. The company’s earnings from operations came in at $13.96 million, compared to a $1.14 million loss in the prior-year period. Its net earnings were  $11.31 million, versus a  $858,862 net loss in the year-ago period. Its EPS was  $1.64, versus a $0.12 loss per share in the prior-year period. And as of June 30, 2021, the company had $890,858 in cash. Over the past year, FRD’s stock has  gained 151.4% in price and ended Friday’s trading session at $13.99.

In terms of trailing-12-month Price/Sales, FRD’s 0.59x is 62.1% lower than the 1.55x industry average. And in terms of trailing-12-month EV/EBITDA, FRD is currently trading at 3.32x, which is 64% lower than the 9.24x industry average.

FRD’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. 

The stock has an A grade for Growth, Value, and Momentum, and a B grade for Quality. Click here to see the additional ratings for FRD’s Stability and Sentiment.

FRD is ranked #9 of 33 stocks in the A-rated Steel industry.

Lifeway Foods, Inc. (LWAY)

LWAY manufactures and sells probiotic, cultured, and functional dairy and non-dairy health food products. The Morton Grove, Ill., company’s primary product is kefir, a dairy beverage that is similar but distinct from yogurt, ranging in various flavors and package configurations. It also offers soft cheeses, cream, and other products. It has an $89.37 million  market capitalization. At the Natural Products Expo East 2021, held from September 22-25th, LWAY introduced its new plant-based Lifeway Oat line and a new Chocolate Kefir flavor that will be available in the markets in late November 2021. By introducing a probiotic drink with an oat base, LWAY is looking forward to benefiting from the rising demand for plant-based nutrition.

On August 18, 2021, LWAY completed the acquisition of certain assets of GlenOaks Farms, Inc., a pioneering probiotic drinkable yogurt brand, to further expand and lead in the probiotic drinkables market, and benefit from GlenOaks’s strong distribution network in California and the West.

For its fiscal second quarter,  ended June 30, 2021, LWAY’s net sales increased 16.6% year-over-year to $29.16 million. The company’s gross profit came in at $7.68 million, representing a 10.8% rise from the prior-year period. LWAY’s income from operations was  $2.49 million for the quarter, up 73.4% from the prior-year period. While its net income increased 65.1% year-over-year to $1.62 million, its EPS increased 66.7% year-over-year to $0.10. The company had $10.41 million in cash and cash equivalents as of June 30, 2021. Over the past year, LWAY has gained 24.8% in price and ended Friday’s trading session at $5.79.

LWAY’s 0.82x forward Price/Sales is 45.2% lower than the 1.50x industry average. In terms of forward EV/EBITDA, LWAY is currently trading at 7.74x, which is 38.1% lower than the 12.49x industry average.

It is no surprise that LWAY has an overall A rating, which equates to Strong Buy in our POWR Ratings system.

The stock has an A grade for Growth, and a B grade for Quality, Sentiment, Value, and Stability. Click here to see the additional ratings for LWAY’s Momentum.

LWAY is ranked #4 of 49 stocks in the B-rated Food Makers industry.

Educational Development Corporation (EDUC)

With a market capitalization of $84.22 million, Tulsa, Okla.-based EDUC is a publishing company that provides  educational children’s books. The company operates through home business (Usborne Books & More) and Publishing (EDC Publishing). It offers touchy-feely board books, adventure, activity and art books, foreign language books, science and math titles, and chapter books and novels. It distributes these books through independent consultants, libraries, bookstores, toy stores, and specialty stores.

On November 1, 2021, EDUC acquired Learning Wrap-Ups, Inc., a wholesale distributor of educational toys for children whose high-quality educational tools fit naturally into EDUC’s Usborne and Kane Miller product lines. Both companies are looking forward to providing improved and quality learning products to schools and homes and generating significant revenues and market reach.

As of August 31, 2021, LWAY had $921,200 in cash and cash equivalents. The stock has declined  42% in price over the past year and rallied marginally over the past month. It ended yesterday’s trading session at $9.73.

In terms of trailing-12-month Price/Sales, EDUC is currently trading at 0.44x, which is 66.5% lower than the 1.32x industry average. In terms of trailing-12-month EV/EBITDA, EDUC is currently trading at 7.08x, which is 35.9% lower than the 11.05x industry average.

EDUC’s POWR Ratings reflect its solid prospects. The company has an overall A rating, which translates to Strong Buy in our proprietary rating system.

EDUC has a B grade for Growth, Momentum, Sentiment, Quality, and Value. In addition to the POWR Ratings grades we have just highlighted, one can see EDUC’s Stability here.

EDUC is ranked #1 of 11 stocks in the Entertainment – Publishing industry.

LEE shares were trading at $20.75 per share on Friday afternoon, up $0.12 (+0.58%). Year-to-date, LEE has gained 64.68%, versus a 26.27% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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