Stocks are showing signs of life in 2023. And if you have a tolerance for risk and are willing to look for stocks to trade, the small-cap sector is one area to find stocks to watch. Historically, small-cap stocks tend to perform very well when market sentiment is moving from bearish to bullish. These stocks can be volatile, but at the same time, small increases in their stock price can mean big gains for your portfolio.  

To find these stocks to watch, I used a stock screener looking for small-cap stocks that had a buy rating and positive news sentiment, but with less than 50% of the relative trading volume. That means there’s reason to believe in the companies, but the stock is still undiscovered. And that means retail investors still have an opportunity to benefit from taking a position.  

Stocks to Watch: AAR Corp. (AIR)  

AAR Corp. (NYSE:AIR) provides products and services for commercial aviation as well as government defense industries. In fact, the company is the largest independent aviation provider in the Americas. The company operates two business units, an Aviation Services, and an Expeditionary Services segment. Both count the United States military as customers.  

AAR recently announced an extension of its distribution relationship with Leach International Corp. This ensures that it will continue to be a key supplier and OEM to the U.S. military at a time when geopolitical tensions are rising. And while ESG initiatives are continuing to draw scrutiny, AAR was also named one of America’s Most Responsible Companies by Newsweek magazine for 2023. AAR is more of a picks-and-shovel play on defense stocks, but the company has an appealing valuation at just 19x earnings (the industry average is around 26). And earnings are expected to grow by around 24% over the next five years. 

Investors may have some hesitancy as defense spending is being scrutinized in Congress as part of the debt limit negotiations. But it’s hard to see meaningful cuts that would affect AAR Corp’s business.  

Stocks to Watch: Seabridge Gold (SA) 

Gold didn’t behave the way many investors (including yours truly) expected it to in 2022. But investor patience is getting rewarded at least early in the year. And if you’re looking for a stock to watch that may be undiscovered by many investors, I’ll point you to Seabridge Gold (NYSE:SA), which holds a 100% interest in the Kerr-Sulphurets-Mitchell project, one of the world’s largest undeveloped gold projects by resources. The mine is forecast to produce gold, copper, and silver for 50 years.  

Seabridge does not build or operate mines. Rather, its role is in the evaluation, acquisition, exploration, and development of gold deposits. However, the mine is not expected to be operational until 2024 at the earliest. And, Seabridge has requested to have an extension until 2026. That may be a tough ask for investors to buy right now, but it may be worth putting on your watchlist. 

Stocks to Watch: Paragon 28 (FNA)

Paragon 28 (NYSE:FNA) specializes in solutions for foot and ankle surgeries. Before you dismiss this as being too niche of a field consider the opportunity. In 2022, the global market for foot and ankle devices was approximately $1.4 billion. According to Research & Markets, this segment will grow at a compound annual growth rate (CAGR) of 7.3% and be worth $2.3 billion by 2029. That’s a large opportunity. Plus, to me, Paragon 28 looks to be an undiscovered gem. As of this writing, the FNA stock was trading at $16.75. But analysts have set a mean price target of $28.56, an upside of over 63%. 

Kura Oncology (KURA)  

The biotech sector is a good place to look for undiscovered stocks to watch. And that’s where you’ll find Kura Oncology (NASDAQ:KURA). In President Joe Biden’s State of the Union Address, he touted his Cancer Moonshot which aims to cut the death rate from cancer by half in the next 25 years.  To make that moonshot a reality, you’ll want to look for companies that are thinking out of the box. That’s the case with Kura Oncology which is attempting to develop an emerging class of targeted therapies called menin inhibitors. The goal is to change the existing paradigm of cancer treatment that focuses on killing cancer cells before they can kill healthy tissue. This approach attempts to “trick’ the cancer cells into becoming healthy cells.  

Kura Oncology is a clinical-stage company. And although the company has a deep pipeline, it will be years before the company has a commercially approved solution. But the company has enough capital to get through 2024. And with a consensus price target that’s 160% above the stock’s current price, KURA stock is a reasonable speculative option for risk-tolerant investors.  

PureCycle Technologies (PCT) 

PureCycle Technologies (NASDAQ:PCT) is addressing the need for effective solutions for recycling polypropylene plastic. The last time I spoke about the PCT stock, I noted that the company is “addressing the reality that consumers are prioritizing sustainability more in where they shop and what they buy.” These consumers are also becoming more aware of the greenwashing that is prevalent among companies trying to stay on the right side of ESG initiatives.  

PCT stock has outperformed the broader market over the last 12 months. The stock is up 33% and analysts project the stock could be a 10x stock. This is still a pre-revenue company but at the end of the prior quarter, PureCycle had $416 million in cash and equivalents. The company also partnered with the National Football League’s Cincinnati Bengals to recycle over 40 tons of aluminum and plastic using the company’s PureZero waste program.  

Insteel Industries (IIIN) 

Next up on this list of stock to watch is Insteel Industries (NYSE:IIIN), the nation’s largest manufacturer of steel wire. Although the steel industry has been beset by many challenges during the pandemic, 2023 is shaping up to be a good year. Much of what is proposed in a State of the Union address never comes to pass. But it does give you some ideas of where the government’s priorities may be. And it was clear in the most recent SOTU address that President Biden continues to focus on infrastructure. Much of the money from the Infrastructure Act is starting to get released into the economy. That is likely to benefit the steel industry. IIIN stock is down over 24% in the last 12 months, but it’s up about 10% since it gapped down sharply after a miss on its most recent earnings report. 

SMART Global (SGH) 

The last of my stocks to watch is SMART Global (NASDAQ:SGH). The company manufactures specialty solutions for the computing, memory, and LED markets. One of the company’s major products is in the area of semiconductor chips. One of its key competency areas is in providing the chips needed in data center applications. The company also provides solutions for the LED market. SMART Global acquired the LED Unit of Cree now Wolfspeed (NYSE:WOLF) for $300 million in 2020.  

SGH beat on both the top and bottom lines when it reported earnings in early January. Analysts give the stock a consensus buy rating with a price target that suggests the stock has a 50% upside from its current price. With a price-to-earnings ratio of 18x earnings, the company is fairly valued and shows a decent growth rate.  

On the date of publication, Chris Markoch did not have (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.