Three undervalued stocks to buy now

Get rich slowly by finding three good-quality companies, then sit back and wait for the price to fall, says professional investor Gary Channon.

Each week, a professional investor tells us where he'd put his money. This week: Gary Channon, Aurora Investment Trust plc.

Long-term investors don't need to concern themselves with short-term or even medium-term moves in stocks or the overall equity market. It's far better to get rich slowly by identifying a very good company, then sitting back and waiting for the share price to fall far below what you think the company is worth (perhaps because of negative sentiment, or a short-term issue hitting the share price).

When that happens, you buy and hold for the long term. And you only consider selling when the company becomes fully valued, or if something fundamentally changes the investment case. Here are three examples of companies that we currently believe are under-appreciated.

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The market undervalues the long-term prospects for Barratt Developments (LSE: BDEV), the largest housebuilder in the UK. For many years now, the UK has not been building enough houses to meet demand. The country needs at least 250,000 new dwellings a year, but just 150,000 are currently being built. The government is seeking to boost supply by reforming the planning system and selling more government land for housing, while the Help to Buy scheme is making mortgages more affordable.

These underlying trends should operate in Barratt's favour. The company's return on capital is nearly 30% (due largely to a current favourable land market) and it has scope to grow volumes each year.

Here's an example of where market perception is at odds with reality: SportsDirect (LSE: SPD). This company is the best-run retailer we have come across.Founder Mike Ashley is a strategic thinker, and a stickler for detail. Recent PR issues have contributed to negative sentiment about the stock; however, our research process means that we visit 60 stores per year, and this leads us to believe that the share-price fall is overdone. It does not reflect the quality of SportsDirect's UK business, or its growth prospects in Europe.

SportsDirect has outstripped its competitors because it is the lowest-cost operator with a business model that means it can sell the same product as a rival at a lower price, and yet still make a higher profit.

Finally, there's Lloyds Banking Group (LSE: LLOY). The bank has been languishing under the UK government's ongoing stake in the company, and payment protection insurance mis-selling compensation hasn't helped either. Yet Lloyds is a high-quality business in a sector with high barriers to entry, which is also undervalued, trading at less than ten times earnings.

The Competition Commission investigated the UK banking sector on the basis that it made too much money. The investigation discovered that banking customers in the UK don't switch banking providers often, suggesting prices aren't a big part of why a customer stays with a bank. Lloyds has substantial market share in current accounts and in mortgages, despite not being the cheapest provider. It's well run and has been subject to a high level of scrutiny since the banking crisis.

Gary Channon, Aurora Investment Trust plc