How can you find undervalued stocks? When stocks become undervalued you might be able to make a profit on them. But how can you find them? Here are a few tips.
There is nearly an endless amount of technical data points that you can look at when analyzing a stock. Many of them can be used to determine if a stock is undervalued or not.
A low P/E Ratio may indicate that a stock is undervalued. The Debt-to-Equity (D/E) Ratio can help you determine where a company gets its funding and if their balance sheet is healthy. The Price/Earnings-to-Growth (PEG) Ratio can be used to determine if a security is undervalued if it is low and earnings are strong. The Price-to-Book (PB) Ratio could indicate that a stock is undervalued if it is less than 1. A high Return on Equity (ROE) may also indicate that a stock is undervalued.
As you can see, there are multiple data points that can be used to determine the underlying value of a stock. Used together, they may help you determine the true value of a security.
If a company pays a dividend, then analyzing it can help you determine its financial health. Has the company paid a consistent dividend over a long period of time? Have they consistently raised the dividend? Have there been cuts or pauses in payments? Answering these questions can give a picture of the company’s cash flow strength.
Watch for companies paying high yields. This might indicate a recent drop in share price. The best indicator of dividends is consistency. If the dividend has been consistently paid out over time, then the company’s finances are probably strong.
Market Capitalization is a calculation of a company’s total market value of its outstanding shares. Studying market cap can give you an idea of a company’s profitability and stability. Just be sure to compare apples to apples. In other words, if you are comparing growth stocks, then you will want to compare companies with smaller market caps.
Studying a company’s financials gives you a picture of its overall health and strength. There are three main reports to consider when looking at financials.
The first thing to look at is a company’s balance sheet. This is an overall view of a company’s assets and liabilities.
Next, you will want to check the income statement. This report will show a company’s revenue and expenses over a set time period.
Finally, a company’s earnings report will show a company’s earnings versus a forecast. These reports are normally issues quarterly.
Studying these reports may point to a stock being undervalued. If a company reports strong earnings and minimal debt over time but their share price isn’t rising, then the stock could be undervalued.
Studying an entire sector can be a useful tool to see if a particular stock is undervalued. If you study for instance the energy sector, then you can compare like companies and see if one has a lagging stock price. If similar size oil companies are all profitable, but one company in particular has a lower share price based on technical, then they might be an undervalued company.
Obviously, it isn’t this simple, but studying the broader market can help to determine a fair share value of a company.
How can you find undervalued stocks? There are many tools available to you if you are searching for stocks that may be on the verge of a breakout. Technical analysis, dividends, market cap, financial reports, and sector analysis are just some of the ways to determine a stock’s fair price. When used together you stand a much better chance of picking winning stocks.
Writer and Investor. Based in the Pittsburgh, PA area, Brian holds full-time employment as a Warehouse Manager for an electronics firm. Brian enjoys wealth building, investing, gardening and the great outdoors. Brian holds a B.A. in Environmental Studies from the University of Pittsburgh and an MBA from Robert Morris University.