Everyone may have different definition for words: "undervalued company". What we mean by "undervalued company" was explained on our landing page.
Basically, for us, undervalued company is a company whose "operating income/ev" is the highest among some set of companies. So, "undervalued" for us means "undervalued" in relation to their financial statements, because it shows how much money given company is making from its operational activities in relation to how much money people would like to pay for it - so we get a multiplier (call it "gem" multiplier).
You can agree with this definition or not, this is up to you. However, what we (and this is well explained on our landing page) and lot of other people showed using historical data (for different time periods and countries) is that in the long term (many years) companies having higher "gem" multiplier have higher chance to outperform (for stock returns) companies having lower "gem" multiplier. That's it.
We are just inferring conclusions from history and we let you use such conclusions.
Please refer to our backtests included on the landing page and other analysis we refer to.
Additionally, I encourage you to watch this video from Google Talks explaining why using such method may work: https://www.youtube.com/watch?v=1r1vJZ80Z7I
Best regards, Wiktor