The efficient market hypothesis says share prices always reflect all available information about the businesses.
However, veteran ASX investors would know that in reality that's not necessarily true.
Sometimes the market just fails to fully appreciate the merits or the cons of a company and the stock becomes under- or overpriced.
Shrewd investors can take advantage of this "inefficiency", assuming that eventually the rest of the market wakes up and the stock price will "catch up".
Image source: Getty Images
'A lot more value' in business than the current valuation
One such candidate is diagnostic imaging provider Capitol Health Ltd (ASX: CAJ).
The share price has fallen almost 17% over the past 12 months, and is actually trading at 21% below what it was in the middle of 2018.
However, Sequoia Wealth senior wealth manager Peter Day noted last month that Capitol Health reported pleasing results.
"First half 2023 revenue of $98.1 million was up 3.4% on the prior corresponding period," said Day.
"In the near term, we forecast a recovery in face-to-face general practitioner consultations as a catalyst for improving imaging volumes."
Shaw and Partners portfolio manager James Gerrish acknowledged that life as a Capitol Health investor hasn't been easy.
"I know Capitol Health has been a frustrating position," he said on a Market Matters Q&A.
"However, we do think there is a lot more value in their business than is being ascribed by the market, something more like 45, 50 cents."
Compared to the Tuesday trading price of 28 cents, a rise to 50 cents would represent a whopping 78.5% upside.
"For that reason, we are remaining patient — pardon the pun!"
The stock pays out a dividend yield of 3.64%, which could soothe the pain while you wait for the share price to climb.
Day also thinks the stock is a prudent buy.
"We believe Capitol Health is well positioned relative to peers given strong specialist recruitment and exposure to recovery locations in Victoria."
