Stocks with a market capitalization of $50 million - $300 million are typically characterized as micro-cap stocks. These stocks are usually riskier investments due to their low liquidity and the issuing companies’ obscurity. While low liquidity often results in substantial price fluctuations, these companies' small stature often obscures their stocks from  retail investors and Wall Street analysts.

In addition, because  the stock market has been rallying relentlessly over the past few months, most large-cap and mid-cap stocks have become highly overvalued. But many micro-cap stocks still have plenty of upside to deliver due in part to their issuers’ easy access to capital thanks to the continued low-interest-rate environment. Also, the continuing economic recovery bodes well for them.

Micro-cap stocks ARC Document Solutions Inc. (ARC) and AstroNova Inc. (ALOT) have gained significantly in price over the past few months. And given their robust fundamentals and reasonable valuations, we believe they could continue rallying in the near term.

ARC Document Solutions Inc. (ARC)

With a market cap of $117.34 million, ARC, a reprographics company, provides document solutions. The Walnut Creek, Calif.-based company develops and sells Web-based document management applications, such as SKYSITE, Abacus, and ARC Print, which facilitate project collaboration, manage print networks, track equipment fleets, create and maintain project document archives, and perform other document and content management tasks. Furthermore, the company operates 148 offsite service facilities that provide project-related printing of construction documents to its customers.

During the second quarter, ended June 30, 2021, ARC’s net sales increased 7% year-over-year to $68.8 million. Its adjusted EBITDA surged 3.7% from the prior-year quarter to $11.1 million. The company’s net income increased 73.4% year-over-year to $2.6 million, while its EPS grew 100% from its year-ago value to $0.06 over this period.

Analysts expect ARC's revenue to increase 1.6% year-over-year to $400.78 million in the current year. The stock has gained 153.8% in price over the past year and 115.2% over the past months.

In terms of trailing-12-months Price/Sales, ARC is currently trading at 0.43x, which is 73.4% below the 1.61x industry average. Also, in terms of trailing-12-months EV/sales, the stock is currently trading at 0.74x, which is 63.5% lower than the 2.04x industry average.

ARC's POWR Ratings reflect this promising outlook. The company has an overall A rating, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

ARC is also rated an A for Value and Quality, and a B for Momentum. Within the B-rated Outsourcing – Business Services industry, it is ranked #2 of 49 stocks.

To see additional POWR Ratings for Growth, Stability, and Sentiment for ARC, click here.

AstroNova Inc. (ALOT)

ALOT, which is based in West Warwick, R.I., designs, develops, manufactures, and distributes specialty printers and data acquisition and analysis systems in the United States, Europe, Asia, Canada, Central and South America, and internationally. Product Identification (PI) and Test & Measurement (T&M) are the company’s two operational segments. It has a $111.58 million market capitalization.

Last month, Airbus qualified ALOT as a Tier 1 supplier for the A320 Family of commercial aircraft. This will enable ALOT to provide its flight deck printers directly to Airbus rather than a third party, which should  strengthen its brand image.

In June, the Chinese Civil Aviation Administration certified ALOT's West Warwick, R.I repair station to provide maintenance, repair, and overhaul services on flight deck printers and related components for clients with Chinese-registered aircraft. This accreditation could enhance the company’s position in the worldwide commercial aerospace MRO market.

During the first quarter ended May 1, 2021, ALOT’s net income increased 37.3% year-over-year to $593,000, while its EPS grew 33.4% to $0.08 over this period. The company’s operating expenses declined marginally year-over-year to $10.15 million. And  its revenue from the product identification segment increased 3.1% year-over-year to $23.1 million.

ALOT is expected to generate 5.5% revenue growth for the current year. In addition, its EPS is estimated to increase 122.2% year-over-year to $0.4 in 2022. Over the past year, ALOT's stock has gained 132.7% in price, and has returned 44.9% year-to-date.

In terms of forward Price/Sales, ALOT’s 0.91x is 77.8% lower than the 4.10x industry average. In addition, its 0.96x forward EV/Sales  is 77% lower than the 4.16x industry average.

ALOT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The stock also has an A grade for Value and Sentiment, and a B for Momentum and Quality. In the B-rated Technology – Electronics industry, it is ranked #1 of 49 stocks.

In total, we rate ALOT on eight different levels. Beyond what we've stated above, we have also given ALOT grades for Stability and Growth. Get all the ALOT ratings here.

ARC shares were trading at $2.55 per share on Thursday morning, down $0.14 (-5.20%). Year-to-date, ARC has gained 76.40%, versus a 21.68% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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