But no one has perfect predictive tools — hence, targeting smaller companies or companies that have recently IPO-ed would allow the investor to compute the intrinsic value and make an informed investment decision before the market realises it through the company’s future financial performance.
One of the harder challenges of investing is discerning the valuation of a recently IPOed or listed company. This is primarily due to the lack of financial information available for assessment (unless the company discloses it over at least five annual financial periods). The good thing about this is that there’s a higher probability of it being misvalued — either undervalued or overvalued.
This is typically the case for smaller companies or those that trade in less-liquid markets with limited investor interaction and analyst coverage. Assuming markets are rational when valuing, larger companies with greater investor interest are usually covered by experts who have the right tools to value them and these companies would trade closer to their fair or intrinsic value, with a lower probability of investors profiting from mis-valuation.
