When calling a stock undervalued, we are, in effect, drawing a comparison. Traditional value investors use a company's economic fundamentals as the basis of a buy signal. For example, if XYZ is trading below book value or the multiples of similar stocks, they buy, assuming the shares will eventually reflect their perceived underlying worth.

More contemporary value investors are buying the Nasdaq, suggesting that tech stocks are undervalued now that they trade at a fraction of their previous highs.

As always, two sides make a market, and there are as many bullish reasons the Nasdaq is undervalued as there are bearish reasons it's overvalued. Like most investment decisions, it ultimately comes down to an arbitrary opinion. Only the tape will tell. And while the analysts scratch their heads on the next move for Cisco (CSCO), I'm snapping up a value play that isn't that difficult to spot: closed-end funds. I strongly believe these offerings, specifically the closed-end country funds, provide a unique and timely value in today's market.

Let's define our terms: A closed-end fund is a mutual fund that trades like a stock. Unlike the more ubiquitous open-ended funds, a closed-end fund's price goes up and down based on supply and demand, irrespective of the fund's net asset value, or NAV, per share. That means it's possible to find funds priced below NAV literally selling for pennies on the dollar.

It isn't unusual to find closed-end funds trading at a discount. Many other writers, including a few here at SmartMoney, have suggested the idea as a supposed sure thing. And yet despite the seemingly obvious reasons closed-end funds shouldn't trade with huge discounts to their NAVs, most usually have. As recently as last year, the average closed-end fund traded at a 13% discount to its actual underlying value.

But as the markets have continued to become more efficient and liquid, and more investors have begun looking for legitimate value, the trend of funds trading at large discounts to their NAVs seems to be ending. The Herzfeld Closed-End Average tracks the average discount, or premium, at which closed-end funds, in general, are trading. Over the past year, the spread between closed-end funds and their underlying NAVs has narrowed by over 13 percentage points, suggesting that , funds trading at large discounts are legitimately undervalued and worth a look.

And while there are closed-end funds that invest in everything from bonds to Brazil, I'm focusing my analysis on closed-end country funds, since their investment prospects are more predicated on international stocks as an asset class, rather than a particular fund manager's expertise.

So even though the stocks held in the Korea Equity fund (KEF) have gained only 4.79% year-to-date, the fund itself it up almost 10%, thanks to a narrowing discount to NAV. The fund still sports an 18% discount to its actual net asset value. There's a similar story at the Chile Fund (CH), which is up over 6% this year, although the actual stocks in the portfolio have gained only 1.4%, and the fund still trades 22% under its NAV. And despite that pesky spy-plane situation, the Greater China Fund (GCH) is up over 20% year-to-date, although only 13% of the return comes from the NAV. The balance comes from a narrowing in the fund's discount to NAV, which still stands at roughly 20%.

More often then not, it isn't what you trade, but how you trade. Investment ideas are a dime a dozen, but if you agree with me that closed-end funds trading at a discount are legitimately undervalued, the next step is to determine the best way to trade them. Closed-end country funds are illiquid, volatile and carry a great deal of currency risk, so I'd recommend a more thoughtful strategy than simply "buy and hope."

Spread It Out

One technique might be borrowed from Michael Milken, the one felonious financier who have received a presidential pardon. It's a diversification play: When Milken began preaching the gospel of junk bonds in the late 1970s and early 1980s, many of them were also selling for a fraction of face value. Using research conducted in the 1950s, Milken correctly realized that even though junk bonds were risky (and indeed many corporations would default on them), buying a large portfolio of junk bonds and holding them over time would help mitigate the market risk and provide attractive returns.

A similar approach can be attempted with closed-end funds. So instead of simply buying one or two funds trading below their NAVs, you might consider pyramiding into a small basket of a half-dozen or more. Not every position will be a winner, but the rewards, especially those of the more volatile emerging markets, could outweigh the risk. Ideally, you'll risk no more then 5% of your overall portfolio. Remember that positions grow large, they don't start out that way.

Or Play the Spread

A slightly more sophisticated strategy would be to trade a spread. Often used by commodities traders as a method of hedging risk, a spread is established by the simultaneous purchase and sale of two different but related securities. The purpose of trading a spread isn't necessarily to buy low and sell high, but to profit from the change in the relationship between the two securities. For example, a popular (and lately profitable) spread has been to buy value stocks and short growth stocks, expecting that whatever way the market moves, the relative spread between the two assets will narrow.

Using closed-end funds, the spread would be established by purchasing a closed-end fund trading with a large discount to NAV while simultaneously selling short the exchange-traded fund, or ETF, that tracks the same underlying index. For example, the Taiwan Fund (TWN) is a closed-end fund that is closely correlated with the iShares MSCI Taiwan Index Fund (EWT) . A trader looking for value might consider buying the Taiwan fund, which is trading at 13% below its NAV, while simultaneously shorting the iShares MSCI Taiwan fund. (Unlike closed-end funds, iShare's prices are actively arbitraged to keep them close to their actual NAV.) Again, the bet here wouldn't be that the price of the Taiwan fund would rise, but that the closed-end fund's discount to NAV would eventually narrow. You'd exit the position by selling the closed-end fund at a profit, the extra gravy from a narrowing spread more than making up for the loss on the short position in the ETF. Similar positions could be established with Malaysia (long Malaysia Fund (MAY), short iShares MSCI Malaysia Index Fund (EWM) ) and other closed-end funds that also have a corresponding iShares surrogate.