Its a very good question and people who are investing mostly will have this same question now. You need to invest in companies which are undervalued compared to peers and run by a professional management with a great potential to generate increasing revenues
“It is far better to buy a wonderful company at a fair
price than a fair company at a wonderful price.”
-by WARREN BUFFET
1.Why undervalued stocks can be best investment??
Undervalued stocks can outperform more popular stocks because they don’t have the built-in premium that current big-hitters have.For example, a popular stock has already had its major run-up, and will most likely do little more only than with the general market. If the market rises by 10% in a given year, the stock may rise by only 10% or 15%.But An undervalued stock has greater potential to perform better, because it can increase in price substantially simply as a result of reaching the common valuations in its sector. A undervalued stock can rise by 50% or more in a single year once it becomes “discovered” by the general market.
2.How to find the Undervalued Stocks??
Underperforming stocks. In every market sector there are always leaders and laggards. You want to always pay close attention to the laggards. That isn’t to say that a stock is undervalued just because it’s trailing others in it’s sector. But if the fundamentals and financials are healthy compared to it’s competitors, it might be because it’s time hasn’t come yet. You’ll want to get in before it does!
Price/earnings ratio (P/E). This is one of the first clues that a stock’s undervalued. If the typical P/E ratio in a sector is 20 and you find a stock trading at 10, you need to investigate. Again, if the fundamentals and financials are comparable to it’s competitors, but it’s not being blessed by one of the investment advisor superstars, it may be a strong candidate.
P/E growth ratio. You can determine this by dividing the P/E ratio by the company’s projected growth rate over the next five years. If the number is less than one, the company may be a strong candidate. Just be careful here: growth forecasts are expectations, not guarantees.
High dividend yield. If you find a company with a 4% dividend yield in a sector that typically pays 2%, you either have a company that’s about to go over a financial cliff, or one that’s a legitimate undervaluation. The higher dividend yield is either the result of a pending financial problem (that will lower the dividend yield) or it’s a case of a stock that’s paying an above average rate, simply because it’s currently out of favor..
Pay attention to market sell-offs. There are usually more undervalued stocks to be found after market sell-offs than at market peaks. Undervalued stocks are a relative rarity in strong bull markets, but can be quite common in bear markets. Bear markets punish good stocks along with the bad, and that creates plenty of interesting opportunities. Always keep some cash on hand, that way you can find these gems after big market sell-offs — when they’re much easier to find.
Be patient! Finding — and ultimately profiting from — undervalued stocks is a slow process. Take your time and be careful in locating legitimate investment opportunities. And when you do, be ready for them to be discovered by the rest of the market. It can take years but the returns can be spectacular.
Once you find a stock as indicated by any of the above (and there are other measures as well), you will need to look into:
·Net earnings growth
·Pending legal or regulatory actions
·Significant issues with subsidiaries
·Issues with primary product lines
·Stability of management
·Unusual geopolitical risk
A problem in one or more of these categories could be the reason for the low stock price, making the stock unable to qualify as undervalued. But if all of the above check out, you may have found a winner.
Even better is a problem with any of these that has recently been resolved. It could be that the stock was depressed by the issue, and now that it’s been remedied it will simply be a matter of time before the market welcomes the stock back into the winners circle. That’s a classic example of an undervalued stock