Undervalued or Misunderstood?
“If you can keep your head when all about you are losing theirs…” –If by Rudyard Kipling
If we got a quarter for every time, we heard a company state it was undervalued, our pockets would be quite heavy. The “undervalued” explanation to all that ails a stock is a common refrain we hear from management of small cap companies—especially during volatile markets. But, don’t fall for it. It’s a trap.
We all tend to identify problems with descriptors, and more often than not, the term “undervalued” seems to fit when the stock is unloved and perhaps, underappreciated by the capital markets. Remind yourself: the markets are merciless when it comes to valuing a company but also, very efficient. To say “our company is undervalued” is really just an opinion, nothing more. It is certainly not shared by the wider market. More than likely, the market simply has never heard of your company or your story. Maybe, it’s not passing their snuff test or more often, falling outside their strict investment criteria.
Valuations can easily be moved in the right direction with one single slide in your investor presentation: “Why Invest”. Put the current operating environment and key business fundamentals into perspective—bulls and bears aside—by addressing recessionary worries, supply chain shortages, post-pandemic fallout, and high inflation. Evaluate whether your reasons need a repositioning vis-a-vis your peers. Make sure it truly reflects your business and take into consideration investor’s lack of appetite for explosive growth versus a newfound fondness for value, given today’s market.
Think of this slide as the grand finale. It’s easy to grasp—go big picture with specific details. State the top five reasons—not every reason. This could be as simple as: a strong balance sheet and predictable growth, a solution to a well-known problem, scalability and a clear path to profitability and positive EBITDA. Spell it out for them, this isn’t the time to be bashful. If you’ve piqued their interest, you’ll see the long awaited “a-ha” moment, heads slightly nodding and eyes clinging to every word (so, choose what you say and in what order, wisely). Show them in your voice, in your stance and your eye contact how excited you are by how your business is performing and why you believe that bodes well for future stock performance.
As we look towards Labor Day and the official end of summer, now is the time to boldly solidify this core investment thesis. If you need advice or an extra set of eyes on your deck or thesis, please reach out. We love helping businesses with strong fundamentals create strong investment theses.
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