To best tackle this topic, one needs to understand what an undervalued stock is. The value of a company is determined by the price of its stock. However, there may come a time when investors lose confidence in what is otherwise a very robust company, forcing the price of the stock to be lower than it should normally be. Finding such a company is akin to looking for a needle in a haystack. However, it is something that is doable and worth venturing into.
The advent of the Internet has turned what was an arduous task into something that is quite easy. Though, it might not be as easy as one may think. Finding an undervalued stock to buy is a task that requires certain skills, acumen and patience
The first thing one has to do, in most instances, is research. You have to investigate which companies you are targeting, or just which companies meet the criteria that you have set. In this case, you are looking for companies with undervalued stocks to buy. After you have earmarked the companies, you would have to now carry a thorough analysis of the stocks. For instance, you would have to examine those companies’ financial data to ascertain their viability.
To successfully engage in this task, you must have a knack for research. The internet is the best gateway to your obtaining such information as well as data. Some companies do post vital information on their websites regarding the status of their stocks. You can also get hold of such information from press releases as well as frequently looking out for business and financial reports posted on various websites. This will lead you to finding companies with undervalued stocks.
For instance, you can easily get very important information on stocks and trading on websites such as Investopedia.com. Such platforms display important information for stock traders. These are places where you can get current news and trends on different companies and various industries. The information you harvest from these sites, such as the stock prices, share earnings, shares outstanding, and so on, can be used in your analysis in order to arrive at what is best for your investment. There is no other better way to find undervalued stocks to buy.
While you are at it, it is very important to keep in mind the company’s history as well as performance. You might want to compare its very recent quarters. You might also want to make a rough projection of what is expected of it in the next quarter. In short, when you are investing companies for the purpose of finding undervalued stocks to buy, you must be certain that the companies you have picked out for consideration are well-established firms.
What you must take into consideration is the rule by renowned architect of Fundamental Analysis and Value Investing Recall Benjamin Graham (1894-1976) on the pricing of undervalued stocks. Graham observed that usually an undervalued stock is just but a third of its actual value. Therefore, the task you have is to determine the actual value of a company! This is quite a challenge especially when you have not passed through business school. However, as some passionate about trading in stocks, it is assumed that you have in one way or another kept yourself abreast in the basics of business and trading in stocks.
P/E Ratio and Earnings Yield For Undervalued Stocks
The next thing you have to do is look at the price-to-earnings (P/E) ratio of your shortlisted company. The P/E ratio shows a stock price divided by the past 12 months of earnings. You must compare this company’s P/E ration with that of its peers, that is, other companies in the same industries. This is important in getting the actual worth of a company. It must be valued against its competitors. As an investor, you want the lowest P/E ratio ever.
For example, a stock said to be selling for 40-times earnings translates in the price of that stock (P) being 40 times higher than the earnings – the E in that formula. This formula generates the earnings multiple. If, for instance, company A’s stock is selling at $30 and generates $3 earnings per share (or EPS), then the earnings multiple for this company would be 30/3, or 10
The earnings yield is the inverse of the earnings multiple. As a value investors, you will definitely go for stocks with the lowest earnings multiple and a high earnings yield.
Generally, you do not need to be a Math whiz to find undervalued stocks. What you need is as much information as you can about the company and its performance.
What To Really Look Out For When Picking Undervalued Stocks
First and foremost, you must look out for the performance of the company. There are unique indicators that will let you in on the prospects of your target. Research and observe the insider trading. The behavior of shareholding staff of a company will give you an idea about that company’s stock value. These are people that have the vital information you are looking for that they will not share with you. If they are buying stocks in their own company, it is a tell-tale that the future looks bright.
You can get detailed information by visiting your local stock exchange commission where these insiders are obliged to report their stock purchases. This information is available for free and can even be found on most financial websites.
Apart from that, you will have to look out for stocks with low trading volume. Every day, certain shares exchange hands. You would need to study the stock’s behavior, say by looking at its chart so that you observe its volume. It is best to compare the annual performance to arrive at a better decision.
Your target company must at least have a high net profit margin. This information is readily available in annual and quarterly reports. What you are looking for is the profit margin of the company. Like said before, this data must be compared with competing companies in the same industry. And bear in mind that you are looking for the net profit, and not the gross profit. This will tell you how low or high the company’s expenses are.
After all is said and done, it should be noted that as an investor does not only need to have some measure of technical knowledge. It is equally important to summon common sense when getting into trading. A value investor is one that is critical about the stock they are choosing buy. The bottom-line is a good research and analysis of the company you have chosen to invest in.