With market sentiment improving, bargain stocks across-the-board have moved higher. However, that doesn’t mean the ship has sailed when it comes to these stocks. In fact, you can still find plenty of undervalued small-cap stocks, many of which trade at extremely low valuations.

Of course, in some cases, stocks in this category are cheap for a good reason. Mostly, due to earnings being set to go off a cliff, either due to changes in the economy, changes in trends, or even more company-specific issues. However, at other times, these stocks have become cheap because the market has overreacted. Either the market is pricing in the risk of deteriorating operating performance as a near-certainty, or said deterioration is a certainty, but even when accounting for it, said worsening has become overly accounted for in its valuation. That’s the situation with these seven undervalued small-cap stocks. Misunderstood by investors, each one could move to a substantially higher price, as the market recovery begins to take shape.

Adecoagro (AGRO)

Adecoagro (NYSE:AGRO) is a Latin American agro-industrial giant. While technically domiciled in Luxembourg, the company’s farming and ethanol processing operations are located in Argentina, Brazil, and Uruguay. About a year ago, AGRO stock soared, as Russia’s invasion of Ukraine, and the subsequent run-up in food commodity prices provided the company with an incredible tailwind. However, shares have since then pulled back, as grain prices have normalized.

Also, as a Seeking Alpha commentator has recently discussed, AGRO’s sugar/ethanol business is facing challenges. With the stock trading for just 5.7 times earnings, arguably these issues are accounted for, and then some. Even when factoring in an expected decline in earnings this year, shares continue to sport a single-digit price-to-earnings (or P/E) ratio. Add in the fact that grain prices remain elevated relative to pre-2022 prices, and results could potentially end up exceeding current expectations.

Build-A-Bear (BBW)

Shares in many mall-based retailers have struggled during the stock market downturn, but not Build-A-Bear Workshop (NYSE:BBW). In 2022, when the market dropped by double-digits, the Build-A-Bear stock ended the year in the green, as the company sustained its massive improvement in profitability.

Yet despite moving higher, BBW stock continues to trade at a low valuation (7.5 times earnings). This is mainly due to high uncertainty over future results. According to Fintel.io, around 20.4% of the stock’s outstanding float has been sold short. The short side is betting big that BBW’s profitability will take a turn for the worse this fiscal year (ending January 2024), as a much-feared recession finally happens. However, this high short interest works to your advantage. With the sell-side continuing to forecast high earnings during FY24, BBW could prove these shorts wrong, fueling a short squeeze.

VAALCO Energy (EGY)

VAALCO Energy (NYSE:EGY) pulled back in tandem with the drop in crude oil prices. A big disappointment of course for investors who got in early last year, but if you’ve yet to buy this energy stock, there may be an opportunity here. Even among undervalued small-cap stocks, EGY stock is cheap. Shares trade for only 3.9 times earnings. And, although lower crude prices point to lower profitability, that isn’t necessarily the case. For one, as China reopens from its Covid lockdowns, oil demand (and prices) could start climbing once again.

More specifically to VAALCO, a recently-completed merger with TransGlobe Energy was immediately accretive to earnings. There are also significant cost savings that would be realized in the years ahead. Even if EGY experiences little multiple expansion, increased earnings could drive a big move higher for shares.

Ethan Allen (ETD)

Admittedly, Ethan Allen (NYSE:ETD) may seem like a risky play at this stage of the economic cycle. Still, even the home furnishings retailer is likely to experience a decline in earnings, especially if a recession plays out. However, the impact may not be as severe to Ethan Allen as it will be with comparable names. As seen in its latest financials, the company has continued to report strong results. Despite a slight decline in revenue, earnings last quarter increased by 15.8%. Assuming Ethan Allen continues to successfully practice cost discipline, a downturn may have a much more mild impact on results in the coming quarters.

With this in mind, ETD stock may be a steal at just 6.4 times earnings. ETD also pays out a 4.45% dividend. This could provide steady returns, while you wait for the stock to bounce back as economic challenges ease.

Hudson Technologies (HDSN)

Hudson Technologies (NASDAQ:HDSN) is another undervalued small-cap stock that beat the market in 2022, yet continues to trade at an extremely low valuation. At current prices, shares in this refrigerant services company trade for only 4.6 times trailing earnings. Even if you account for a big expected earnings drop this year (from $2.77 to $1.21 per share), HDSN stock is still cheap, at just 8.5 times forward earnings. Furthermore, as I argued last September, Hudson may have a strong catalyst, in the form of federal environmental regulations.

A decline in earnings this year, and in the coming years, may not be as severe as currently anticipated. I wouldn’t assume that HDSN, after rallying by nearly 174% in the past year, will be a similar move over the next twelve months, but I wouldn’t assume that it’s on the verge of topping out, either.

Sally Beauty (SBH)

Sally Beauty (NYSE:SBH) is a purveyor of beauty supplies for both individuals and businesses such as hair and nail salons. Trading for only 9.5 times earnings, SBH stock is clearly undervalued. Although there’s not much in the way of growth expected, SBH’s earnings are expected to hold fairly steady over the next year. Sally Beauty is likely more recession-resistant than other specialty retailers.

I’m not the only one who believes SBH has become mispriced. Back in December, analysts at Piper Sandler upgraded the stock, citing that wise moves by the company regarding both its bricks-and-mortar and e-commerce segments bode well for future results. Although investors have started to catch on to the stock’s rise since this upgrade, it’s not too late to buy, given its low valuation.

Smith & Wesson (SWBI)

Smith & Wesson (NASDAQ:SWBI) has traded wildly over the past years. Record gun sales during 2020 and 2021 resulted in a massive jump in revenue and earnings for this famous firearms manufacturer. This sparked a massive run higher for SWBI stock, with the stock zooming from single digits to the mid-$30s per share. Yet with demand dropping in 2022, this stock has given back most of its pandemic-era gains, as this controversial industry’s tailwinds from that era have come to an end.

So, with the latest “gun boom” now over, what makes it a buy today? While a forward P/E multiple of 12.2 may seem high compared to the other undervalued small-cap stocks mentioned above, this valuation more than takes into account firearm demand normalization. In addition, as public safety fears keep rising, the next upswing for this cyclical industry could happen far sooner than expected.

On the date of publication, Thomas Niel 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.