Potential profits in learning to love the undervalued

In the new Martin Scorsese drama The Wolf of Wall Street, a crazed trader strikingly conveys the volatile nature of trading. "Nobody knows if a stock is going to go up, down, sideways or in circles," the trader, Mark Hanna (Matthew McConaughey), says.

In the new Martin Scorsese drama The Wolf of Wall Street, a crazed trader strikingly conveys the volatile nature of trading. "Nobody knows if a stock is going to go up, down, sideways or in circles," the trader, Mark Hanna (Matthew McConaughey), says.

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.

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