Notice that even though the price rise exceeded 30%, it is hardly noticeable on the graph.
The following estimated earnings and return calculator illustrates the potential that this small-cap technology stock offers given the assumptions of an accelerated 12% growth rate as discussed above. The 39.2% five year estimated annual total return is calculated based on an accelerated 12% growth rate of earnings and the PE ratio expanding to a more rational 15. Both of those currents are reasonable and indicative of how undervalued the company is. In other words, it's the undervaluation that can be attributed to such a high long-term potential rate of return.
Summary and Conclusions
This article was motivated by the over 30% rise in the stock price of Net1 UEPS Technologies (UEPS), small-cap NASDAQ technology stock in one trading day. We believe that the primary reason this is happening is because the market was grossly undervaluing this company shares. Consequently, a piece of good news stimulated an incredible 30% advance in one single trading day. Common sense would tell us that the intrinsic value of a business, even a small business like Net1 UEPS Technologies (UEPS), could not logically change by a magnitude of over 30% that quickly. Unless of course, it was through a merger, that increased the size and the value of the business by that much. The win of a contract, even a big contract like they announced today, would be unlikely to have such an impact.
On the other hand, when reviewing the company's stock price prior to the announcement, it was obvious that this profitable small business was being significantly undervalued by Mr. Market. The fundamentals underpinning this company, and therefore its stock price, were far better than what the market was, in our opinion at least, applying. The point we are attempting to illustrate with this example is the undeniable reality that Mr. Market can and often does completely miss the mark when pricing businesses. It is our contention that when the market does this through undervaluation, it simply means that the business has temporarily become illiquid. In other words, it cannot be sold for what we refer to as True Worth™ and what others call intrinsic or fair value.
Of course, when the market significantly overprices a stock like it did Netflix (NFLX) in the summer of 2011, we would argue that the stock becomes highly liquid. In other words, it is begging to be sold. But, when a company is being ridiculously undervalued based solely on negative psychological sentiment, we believe the stock is begging to be bought. The fundamentals of Net1 UEPS Technologies (UEPS) represent a significant bargain based on a true and realistic value of its earnings and cash flows. This was true prior to today's announcement, and therefore, should be even truer now.
The last two graphs in this article are hypothetical in nature for 2012 and beyond, and therefore, should not be relied upon as accurate. Moreover, these graphs were drawn utilizing some basic assumptions, that although we felt were logical, are as of yet unsubstantiated. Management has indicated that they will offer updated guidance on February 10, 2012 during their regularly scheduled earnings conference call. Nevertheless, we believe that based on the expectations for this company prior to this great new contract, that their shares were being significantly undervalued. However, each investor is advised to conduct his or her own due diligence prior to investing.
Disclosure: No positions at the time of writing.
Disclaimer:The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.