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Are these the last cheap small caps?

Expensive, little value, fully priced, frothy – these would all be reasonable ways to describe the equity market at present. A bargain, opportunities galore, undervalued – these would not!

For Foolish long-term investors, the ebbs and flows of the market create opportunities to buy and occasionally sell an ownership share of a business. While the market at present doesn’t represent overvaluation (although there would appear to be some pockets) so extreme that it could lead investors to consider selling some of their holdings, the market overall isn’t cheap and there are few pockets of value in which attractive investment opportunities currently lie.

One space where there may still be some opportunities to discover undervalued companies is amongst small capitalisation or ‘small cap’ stocks. There are many different definitions of small caps, but here we’ll define a small cap stock as one with a market capitalisation between $150 million and $350 million, and we’ll limit the search to the industrials sector.

Here are a few stocks that either haven’t been swept up in the rally and are looking a little on the undervalued side, or that may have rallied but their growth outlook makes them still appealing at current prices.

1. Silver Chef (ASX: SIV) has rallied strongly but with a solid outlook for growth at current prices, the stock could have further to go. It may not remain in small-cap territory for much longer!

2. Programmed Maintenance (ASX: PRG) is currently on a forecast price-to-earnings (PE) ratio of 10 times with a positive outlook for earnings and dividend growth over the next couple of years.

3. Maxitrans (ASX: MXI) is on a trailing PE of 8.8. The near-term growth outlook is dim for Maxitrans but it could be overly reflected in the price.

4. Crowe Horwath (ASX: CRH) has taken a beating over the past few years  but consensus forecasts (from Morningstar) suggest financial year 2013 was the low. With the share price near an all-time low and the stock trading on a forecast PE of 10.5 times, things may no longer be getting worse for shareholders in Crowe Horwath.

Foolish takeaway

Finding smaller companies with the potential to become larger companies is a great way to grow your wealth. As the equity market marches higher, some investors may choose to consider smaller companies that are less followed by the rest of the market and more likely to be mispriced.

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Motley Fool contributor Tim McArthur owns shares in Programmed Maintenance Services.

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