How to Spot Undervalued Companies Before Others Do

If you’re planning on buying a business, you’re probably looking for something that’s thriving. But once it’s made headlines, the best opportunities are already gone. The way you make real money is by finding undervalued businesses before others do and realize the potential that’s not obvious to the rest of the market. 

But the trick is knowing how to find them because, if they’re not obvious, what kind of magic does it take to spot them? 

A company that’s undervalued isn’t the same as the one that’s failing. They’re just overlooked. It could be that their branding is off, maybe their industry is having a hard time at the moment, maybe the investors took off too soon. Whatever the case, they still have a strong foundation and there are plenty of ways in which they could thrive. 

If you catch on before others do, you’re in for a good deal of profit, so let’s see how to find these hidden gems. 

What Makes a Business Undervalued?

There are several reasons as to why a business is undervalued, but usually, it comes down to market perception, not so much actual performance. 

Sometimes, the company’s stock price or market value doesn’t accurately represent its true worth. Investors might panic because of temporary issues within the industry, maybe there’s bad press, or economic uncertainty. For instance, say the prices of oil dropped. Because of that, energy companies will see their valuations plummet even if their balance sheets are strong and they’re profitable in the long run. If you’re a smart investor, you’ll recognize these temporary mispricings and take advantage of them before the market corrects itself. 

There are also businesses that have internal problems and then they seem weaker than they are because of them. Poor leadership, weak marketing, outdated operations… All of this can stage them down even if their core business model is actually sound. The difference between a company that’s undervalued and one that’s failing is that the first has issues that can be fixed. 

Some businesses bounce back fine after a change in leadership or a shift in strategy. Look at Apple in the 1990s. Before Steve Jobs came back, the company was struggling. Then, just a few key changes turned the whole thing around and now, they’re one of the most valuable brands in the world. 

How to Find Undervalued Businesses

Crunching numbers won’t get you very far here. What you need is to be able to see something others don’t. Heres how.

1. Do Your Research

Businesses that are covered by mainstream media and stock market reports are not those you’re interested in. You need to look beyond all that and research private businesses, small-cap stocks, and niche industries that aren’t getting that much attention. A lot of companies fly under the radar because major investors don’t care about them; they’re just too small. Until they’re not. 

Research industries that aren’t making headlines all the time and you’ll surely stumble upon those that are overlooked, but financially solid. 

2. Analyze Competitor Benchmarks

One of the easiest ways to find an undervalued business is to simply compare it to the competition. If you have two businesses working within the same industry, serving the same customers, and having similar revenues, but there’s one that’s cheaper than the other, it could be undervalued. 

You can even compare them across different countries, provinces, states, cities, etc. Here’s an example:

And while you mightn’t be looking to start an oil/gas empire (or maybe you are), looking at such data points can help you look at competitors, effective long-term growth strategies, plus the most efficient methods of operating such a business.

Pick an industry and start comparing in order to find a great business to invest in. If you’re looking for businesses for sale in Calgary, why not compare trends with cities like Toronto or Montreal? They’re all likely influenced by dominant industries, so you could get some valuable information there.

Sometimes, the stock price goes down just because the company is not very well known, which is what usually happens in industries that have dominant players. Smaller companies get overlooked even though their fundamentals are better. 

Look at Uber and Lyft. Uber dominated in the beginning and although Lyft had just as much potential, it was undervalued. But then, suddenly, investors recognized Lyft as a good opportunity and the rest is history. 

3. Spot Businesses Going Through Changes in Leadership or Strategy

A business that’s been struggling for years can be turned around with good leadership. Usually, changes involving management or strategy can make the business go from struggling to thriving. In fact, some of the most undervalued businesses are the ones going through transitions, especially if their past problems make investigators hesitant. 

Microsoft is a great example of this. In the 2010s, under Steve Ballmer, they were having issues with innovations and their stock was stagnant. But when Satya Nadella took over and changed the focus to cloud computing, Microsoft became the giant that it is today. 

Conclusion

Finding an undervalued business that has potential to become big is never easy and any investment is a risk. That’s why you need to take your time, do your homework, and follow trends and patterns for a while. 

This is about more than just sheer luck and if you dig deep enough, you’ll strike gold before the rest of the world catches up.