Small-cap stocks have been among the worst performers in the past few years. They’ve only delivered above-average gains during the 2021 boom, but the current market environment is far from friendly to these stocks. It’s not a good idea to expect these stocks to beat the market collectively like they did back then.

But it’s also a bad idea to miss out on some under-the-radar penny stocks that are trading below their intrinsic prices after the latest selloff. The Russell 2000 Index is still down almost 14% from its late 2024 peak. That index started outperforming the market in Q4 2024, but the music soon stopped due to tariffs and AI fears.

Now, it’s a good idea to go for bargain hunting, as many penny stocks trade at bargain levels. The following three have little downside risk and solid upside potential.

Matthews International (MATW)
Matthews International (NASDAQ:MATW) sells memorialization products like caskets and is also involved in industrial tech like energy and warehouse services.

The stock has usually been among the most consistent in the small-to-mid-cap range. In recent years though, the stock hasn’t been nearly as performant. It started declining in 2017 as the company’s segments entered a decline, and management made bad acquisitions and took on debt.

That stabilized in mid-2020, and the stock was on an uptrend before coming down again in mid-2022 and continuing on a second recovery rally that peaked in mid-2023. I’m bullish on this stock since the current price is basically right near the $20 floor price it has bounced off of multiple times in the past five years.

This time, Matthews International could recover significantly if the Federal Reserve goes through with rate cuts. It has to service the $873 million debt it has on its balance sheet and that’s mainly why the company wasn’t profitable in Q4 2024. Net interest income was -$15.7 million, compared to a $3.5 million net loss.

Analysts have a consensus price target of $40 on the stock, which implies a 60.3% upside. It also comes with a 4.24% dividend yield.

Bird Construction (BIRDF)
Bird Construction (OTCMKTS:BIRDF) has a pretty self-explanatory name: it engages in construction. It’s a Canadian company that could gain a lot in the coming years as the country focuses on building out more infrastructure and housing. The stock is also down 32% from its peak in 2024, though it is still up 371% in the past five years as Canada’s real estate market has been among the hottest.

The company missed the top and bottom lines slightly, but I expect long-term trends to carry it much higher. Q4 revenue grew 18.26% to CAD 936.7 million, and net income grew 36.1% to CAD 32.5 million.

I’m bullish because it has a lot to gain as the company builds multi-family residential buildings in Canada, but it can’t build many of those due to building code complications. However, Canada’s current Prime Minister and leading candidate, Mark Carney, made an opinion post last year:

“Canada is projected to be short by roughly six million homes come 2030… First, we need to build up, rather than out. Focusing housing growth in cities and communities where there is existing infrastructure such as roads, water lines, libraries and community centres is faster, less costly and more climate-friendly…”

Bird Construction has a lot to gain from that. Even if Mark Carney does not remain Canada’s PM, the opposition leader is strongly pro-home building.

The consensus price target of $30 implies almost 100% upside potential.

Astec Industries (ASTE)
Astec Industries (NASDAQ:ASTE) makes road-building equipment. The stock has been sliding for the past four years and is at $36 right now. This is near the company’s historical floor price, from which it has bounced up several times. It is also at a 53% discount from its 2021 peak.

Astec Industries grew its Q4 revenue by 6.5% and net income by 41.6% but still missed on the top line and disappointed expectations by 4%. However, these disappointments seem quite priced in at current prices as it trades at just 13 times forward earnings. Analysts expect EPS to rise from $2.6 this year to $3.2 next year, along with revenue growth holding steady at around 4%. The company also pays dividends, so it’s hard to see it go lower.

Net debt remains low, and almost 80% of its operating revenue is tied to the U.S. It derives very little revenue from the “dirty 15” countries. That said, it could still take a hit if steel prices rise due to a trade war, but I expect any margin compression from that to be minimal.

Regardless, the financial footing is strong, and the infrastructure boom in the U.S. is still ongoing. I’d buy the dip as you can sit on its dividend yield of 1.43% as ASTE recovers.

— Omor Ibne Ehsan

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Source: Money Morning