Potential profits in learning to love the undervalued
As Hanna implies, stock market investment always involves risk and uncertainty, which, for the small investor, means you must do your own research and only invest with caution.
Meanwhile, here is a round-up of some promising stocks that analysts think just might be undervalued - much more likely to rise than go sideways or worse.
Adcorp Australia Limited (AAU) 10¢ The advertising-agency services stock Adcorp Australia Limited has had a rough few years, stock market analyst Greg Atkinson says. As applies to many "small cap" shares in smaller companies, the risk is "fairly high", Atkinson says, but on the plus side AAU pays a "very healthy" fully franked dividend, on which the firm has already paid tax. Atkinson adds that he likes the return of about 17 per cent. Another perk is that the company is cash-flow positive and debt free, he says, disclosing that he has an interest in Adcorp shares. Growth of 20 per cent seems possible over the next two years, he says.
DWS Advanced Business Solutions Ltd (DWS) $1.50 DWS Advanced Business Solutions Ltd is also widely rated as undervalued, the co-founder of the personal finance website Money Crashers, Andrew Schrage, says.
DWS posted a strong dividend yield of 11.7 per cent earlier this year. It offers a "very low" price-to-earnings ratio of 11:2. Good bang for your buck. The online valuation tool ValueCruncher has rated DWS as undervalued by a sizeable 47 per cent.
Musgrave Minerals Limited (MGV) 5¢ Another undervalued Australian stock with solid potential, according to Schrage, is the base-metal exploration company Musgrave Minerals Limited.
Burdened by virtually zero debt, according to Schrage, MGV trades at about seven cents and has a market capitalisation of about $8.5 million. Better yet, it is led by a strong management team and has a solid track record of success, Schrage says.
Data#3 Limited (DTL) 5¢ Schrage's other hot pick is the information-technology solutions vendor Data#3 Limited. After averaging a 40 per cent return on equity over the past 10 years, it has recently traded below its value.
According to Schrage, Data#3 is expected to rally in light of Australia's burgeoning small-business and IT sector.
Byron Energy Ltd (BYE) 48¢ The oil and natural-gas firm Byron Energy Ltd pays 24 per cent income, fully franked, and its liabilities have dropped from $24 million to $1 million, according to wealth coach Jeremy Britton.
Britton adds that BYE's sales have picked up dramatically.
So BYE just might be a good bet, although one good year does not set a precedent, Britton warns, adding that storms could lurk on the horizon. Do more homework, he says.
Frequently Asked Questions about this Article…
Analyst Greg Atkinson notes Adcorp (AAU) has struggled recently but pays a very healthy fully franked dividend, offers about a 17% return, is cash-flow positive and debt free. He also discloses an interest in the shares and suggests around 20% growth could be possible over the next two years—though he reminds investors small-cap stocks carry fairly high risk.
DWS was highlighted for a strong dividend profile—it posted an 11.7% dividend yield earlier this year—and a low price-to-earnings ratio (about 11.2). Money writer Andrew Schrage and the valuation tool ValueCruncher also rate DWS as substantially undervalued (ValueCruncher by ~47%), making it attractive to income-focused investors while still requiring normal investment caution.
Andrew Schrage points to Musgrave Minerals (MGV) as a base-metal explorer with solid potential: it trades at about seven cents, has a market capitalisation near $8.5 million, carries virtually zero debt, and is led by an experienced management team with a good track record—attributes that can appeal to value-oriented investors in the exploration sector.
Data#3 (DTL) is an information-technology solutions vendor that has averaged a 40% return on equity over the past 10 years. According to Andrew Schrage, it recently traded below its value and could rally as Australia’s small-business and IT sectors expand, making it a potential undervalued pick for investors interested in IT exposure.
Wealth coach Jeremy Britton notes Byron Energy (BYE) pays 24% income, fully franked, and has reduced liabilities from $24 million to $1 million while sales have picked up dramatically. However, he cautions that one good year doesn’t set a precedent and warns investors to watch for potential future risks.
The article reminds readers that stock market investing involves risk and uncertainty—small-cap shares can be especially volatile. Analysts advise doing your own research, investing with caution, checking dividends, cash flow, debt levels and management quality, and being mindful that past performance isn’t a guarantee of future returns.
The article gives specific signals: Adcorp (AAU) is yielding a roughly 17% return with a possible ~20% growth over two years (per Greg Atkinson); DWS shows an 11.7% yield and a low P/E (~11.2) and was rated ~47% undervalued by ValueCruncher; Data#3 has averaged 40% ROE over 10 years; Musgrave (MGV) and Byron (BYE) are flagged for low debt and improving fundamentals—each indicator helps investors assess potential upside while keeping risk in mind.
Follow the article’s guidance: research the company’s dividend history, cash flow and debt levels, management track record, market capitalisation and sector outlook. Note any analyst disclosures (for example, Atkinson disclosed an interest in Adcorp), verify recent financial performance, and remember to weigh potential returns against the higher risk often found in small-cap or undervalued names.
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