When I meet company management these days, if I haven't been told within two minutes that the company is significantly undervalued I start to worry whether the chief executive knows what he's talking about, or whether I've missed a vital part of the conversation.
It's all too easy, and usually fully justified, for management to highlight multiple areas where the value of a company's earnings, assets or prospects haven't been fairly reflected in its share price and market capitalisation. This is particularly true when the shares are traded on the Alternative Investment Market (Aim), London's secondary market. Aim-traded companies frequently suffer from relatively little, if any, broker coverage and are therefore often misunderstood and prone to inaccurate market evaluation.
The difficulty companies face is that while management can make compelling arguments for why certain assets or businesses should carry higher valuations, or why the earnings potential has been understated, these are usually only opinions that aren't able to be independently verified.
In addition to the lack of research, one of the main reasons why such undervalued bargains can stay undetected on Aim is the nature of Aim itself. One of the crucial differences between Aim and the Main Market is that companies can come to Aim without a trading record - and can therefore present investors with just hope value not yet tainted by the rigours of reality and a performance track record.
But there are a small number of Aim companies which can be demonstrated to be clearly undervalued against objective and independently verifiable parameters - without having to rely on management representations. These companies hold tangible, easy-to-value assets such as cash and listed investments against which their valuations can readily be compared.
Additionally, in the natural resources sector companies regularly trade proportions of their mineral licences in return for cash or guaranteed work programmes. Incoming partners agree to invest fixed sums in return for an agreed percentage of the licences, thus enabling the value of the companies' remaining interests in those licences to be imputed.
