79% drop in 16 months: 2 small-cap ASX shares now priced right to buy

These heavily discounted stocks could give your portfolio a huge boost, according to Morgans.

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Reporting season can be tricky to navigate, especially for small caps.

One ASX company may have reported bumper results while another could have disappointed the market.

But, counterintuitively, they might both be considered must-buys.

Here is precisely such a situation with two ASX small-cap stocks that the team at Morgans rated as buys this week:

'A high quality result'

Superloop Ltd (ASX: SLC) is the easy one.

On Tuesday, the internet service provider reported excellent performance for the 2023 financial year, so it's a no-brainer for Morgans.

Investors need to get on it.

"Superloop's result was a beat on guidance from earlier in the year and saw the company generate positive free cash flow and NPATA in the 2H23," senior analyst Nick Harris said on the Morgans blog.

"It was a high quality result with Underlying EBITDA up 82% YoY on a reported basis and up 46% YoY on an organic basis. Cash flow conversion was strong at 116% conversion."

Superloop is executing its sales and marketing with aplomb, and Harris sees no reason why this can't continue into 2024.

"Annualising 2H23 EBITDA sees SLC start FY24 year with $50 million of EBITDA and leaves plenty of upside vs consensus."

Other professionals agree with Harris and the Morgans team.

According to CMC Markets, the $340 million company is rated a buy by all three analysts that cover it.

That's enough punishment

Industrial chemicals maker DGL Group Ltd (ASX: DGL) is the more nuanced buy recommendation.

Monday's annual results were certainly down on last year, bringing the stock price down 6.25% on the day.

"DGL's FY23 result (EBITDA: $64.1 million) was within the guidance range, whilst reflecting a slight decline on the pcp — arguably a reflection of the unprecedented earnings achieved during FY22, which management flagged as delivering circa $15 million of extra profit in FY22," analyst Andrew Tang said on the Morgans blog.

However, the Morgans team is still bullish on its thesis, which relies on "the aggregation of sub-scale chemical formulation businesses (and ancillary services), to deliver an end-to-end solution for the manufacturing, and recycling of specialty chemicals".

Investors have alarmingly abandoned the stock in 2023, painfully sending the share price 40.75% year to date.

If you go back to April last year, it's a 79% fall from grace.

That sell-off is now overdone, reckons Tang.

"Whilst acknowledging that management missteps leave investors approaching the company with trepidation, we believe at the current share price there is sufficient margin of safety."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended DGL Group and Superloop. The Motley Fool Australia has recommended DGL Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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