One of the most popular ways investors find opportunities in the stock market is by hunting for undervalued shares. The logic’s simple: if a company’s fundamentals are solid but its share price doesn’t reflect that strength, then it might be trading at a discount. And that can mean opportunity.
To identify these opportunities, investors often use valuation metrics like the price-to-earnings (P/E) ratio and the price-to-sales (P/S) ratio. Even better is the P/E growth (PEG) ratio, which accounts for earnings growth compared to price.
But buying a falling stock can be risky. After all, just because a share has dropped doesn’t mean it’s due for a rebound. Some never recover at all.
So how can investors separate a genuine bargain from a value trap? I look at things like the company’s market share, its cost controls, operational efficiency and whether the management team has a clear plan to navigate short-term pain.
On that note, one small-cap stock that recently caught my attention is McBride (LSE: MCB).
Could this be a hidden gem?
McBride specialises in private-label manufacturing of cleaning and personal care products, supplying many of the major UK supermarkets. It’s not a glamorous business, but it’s a necessary one — and that counts for something in an uncertain economy.
The share price collapsed 22% in July following a profit warning, knocking it back to 124.6p. But zooming out, it’s still up 16% year-to-date, suggesting the long-term trend isn’t entirely broken.
More importantly, at this price, the valuation metrics are extremely compelling. The P/E ratio stands at just 5.45 and its PEG ratio’s a remarkably low 0.04. That could suggest the market’s significantly undervalued the company’s earnings potential.
McBride’s also highly profitable on a return basis. Its return on equity (ROE) sits at a staggering 64%, well above the sector average. That said, the business operates on thin margins (just 5%), which could be squeezed further if input costs rise or if customers continue to trade down to cheaper alternatives.
Balancing reward and risk
A glance at the balance sheet shows a mixed picture. The company carries £117m in debt against £81m in equity. That’s not ideal — particularly if earnings disappoint again. However, it does produce a decent £51.5m in operating cash flow, which should provide some flexibility in the short term.
What worries me more is the sector. Private-label goods are in high demand, but they’re also fiercely competitive, with low-cost rivals always circling. And with a market-cap of just £213m, McBride’s more vulnerable to volatility and sharp swings in investor sentiment.
Seeking value
McBride looks like a compelling opportunity for small-cap bargain hunters — but it isn’t without risk. The profit warning in July was a blow and further earnings disappointments could push the share price even lower.
But I believe it’s currently one of the more interesting developments on the UK stock market today. It has a deeply discounted valuation supported by solid management and well-established operations.
For value-focused investors who can stomach some turbulence, it’s certainly one worth considering — and one that’s now firmly on my radar.
