Three small-cap potential winners the market has missed

Professional investor Stuart Widdowson of the Odyssean Investment Trust, picks three smaller UK stocks that are trading at a discount to their intrinsic value.

One way investors can reduce risk is by buying assets trading at a discount to their intrinsic value. Several metrics can be used to determine the value of a business, including the price/earnings (p/e) and price-to-book value (p/b) ratios. Two others are Ebitda (earnings before interest, tax and amortisation) and Enterprise Value-to-Ebitda. The process can be more complex if a company has several operating divisions, which may have different attributes and prospects. The sum of private market valuations – the value that a trade or private-equity buyer would pay to acquire control – for each division may be higher than the valuation of the whole company, producing a discount to a “sum of the parts” valuation.

These discounts can narrow for several reasons. The stockmarket, driven by news or a shift in sentiment, can change its view of the valuation of the company; boards can unlock shareholder value by disposing of one or more divisions; or an investor identifies the opportunity and bids for the company. Below are three examples of smaller British firms that we believe are trading at notable discounts to their potential sum-of-the parts valuations.

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Stuart Widdowson

Stuart is a professional investor and Managing Partner at Odyssean Capital LLP. Prior to this, Stuart was a fund manager of strategic funds at GVQ Investment Management Limited for just over 10 years and then he spent 6 months as a partner at Harwood Capital to establish a new fund management business. He has been at Odyssean Capital LLP for just over 5 years and he has contributed to MoneyWeek’s share tips.