Most stocks within the Australian market are fairly priced and deliver expected returns, but mispricing can occur when the impact of significant change has been underestimated, according to an Australian boutique investment firm.
Monash Investors director Simon Shields said in his 30 years investment management experience most stocks are properly priced due to the ongoing attention paid to them by investors, analysts and researchers.
“We start from the position that most stocks are fairly priced most of the time and by that I mean the price is within 10 or 15 per cent of what it should be,” Shields said during his presentation at the Australian Shareholders’ Association Virtual Investment Forum.
“They are pretty well priced because so much information is out there, particularly for the big companies, and the analysts are looking at it all the time as are individual investors who are making their own decisions.”
He added that because of this pricing, most companies also perform in line with what the market expects and outlying positive and negative-performing stocks may be worth considering instead.
“Every year we can look at what the stocks have done and there are stocks that have done either a lot worse than the market or a lot better, and the question is: can we identify some of these stocks in advance when everybody’s dealing with the same information?” he said.
He said a key way of identifying these mispriced stocks was the underestimation of significant change for a company.
“For example, if a business has got a new product that’s rolling out that is a large change and analysts have difficulty incorporating those numbers correctly into their forecast because it’s all very new and they don’t want to be too aggressive in the forecasts,” he said.
“They want to wait and see if things are working out and they only tend to have a good grip on the near term because that’s the bit they can be sure about.
“We have seen time and time again that the market tends to underestimate change and as a young analyst I wouldn’t have picked any of these things, but now in my 50s I’ve seen this so many times.
“This is one of the things that raise our suspicions and give us confidence when we find stocks that we think are mispriced to do the numbers and get in there.”''