It’s well-known that stocks inside the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) are usually ‘efficiently priced’. That means because so many analysts cover each stock, the chances of finding a materially-undervalued company is quite difficult and rare.
Take Woolworths Limited (ASX: WOW) shares as an example. Before this week’s profit warning, I believed Woolworths’ shares were worth anywhere between $26 and $28, yet despite all the negative news in the marketplace it shares were trading at, or slightly below, this range.
Sure, they may have fallen to $23 or $24 once or twice, but the margin of safety (between the $26-$28 range and $23-$24 range) was not wide enough to justify an investment. Aside from major economic setbacks or market crashes — like the GFC — you’ll rarely find a bunch of blue chip stocks falling into ‘bargain’ territory.
For me, a ‘bargain’ only occurs when a company is trading at a discount to fair value of at least 30% — preferably more!
However, while you might be a little shocked to know, small-cap — and to a lesser extent mid-cap — stocks often trade in bargain territory. Sure, you’ll have to wait for a little. But eventually a compelling opportunity will present itself.
3 bustling ASX mid-cap stocks
These next three stocks mightn’t be a ‘bargain’ right now, but I think each are investment-worthy, and when prices drop, investors should be ready to capitalise and buy some of their shares for their portfolio.
- Carsales.Com Ltd (ASX: CAR) – Carsales is the leading automotive listing site in Australia, but it also has strategic holdings in its international equivalents throughout Asia and further abroad. New vehicle sales are currently reaching record highs; however when they start to decline it could be a perfect opportunity for long-term investors.
- Altium Limited (ASX: ALU) – Altium develops and distributes software that is used to design printed circuit boards (PCBs). PCBs are used in almost every electronic device, from television remotes to cars. Altium is an innovative leader in this field. An expanding product suite and international exposure provide long-term growth prospects for the company’s shareholders.
- M2 Group Ltd (ASX: MTU) – M2 Group is set to merge with Vocus Communications Limited (ASX: VOC). Where M2 provides the retail exposure, through brands such as Dodo, Primus, Eftel and Commander, Vocus provides the backbone infrastructure. While M2 appears only slightly undervalued at this time, its shares would certainly be a worthwhile investment over the long term – at the right price.
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Motley Fool contributor Owen Raskiewicz has a financial interest in carsales.com Limited, M2 Group Ltd, and Woolworths Limited.
Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.