Valuation in Context

The Neglected Stock Effect

The neglected stock effect suggests that lesser-known companies will outperform more famous companies on the stock market, as they have greater information inefficiencies that can be exploited.  

The idea simply suggests that some companies are neglected by analysts, due to limited information on them, allowing smart investors to make abnormal returns if they can identify them. 

Companies that usually experience the neglected stock effect are usually small, operating in a less popular industry. For instance, it could be a small company operating in the utilities industry. 

Neglected stocks can be spotted easily as they simply don’t receive many reports from analysts. They also tend to be undervalued by the market as they are either unknown to or unpopular with investors. 

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