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Monday, October 15, 2012

How to Find Undervalued Stocks

 In order to find undervalued stocks, first you should develop a list of stocks you want to analyse depending on your basic criterias, secondly analyse financial datas from each of these stocks and perform a more in-depth analysis.


It is now easier than before to find financial datas on the internet with website such as bloomberg, yahoo finance and on the website of the company itself where they usually have the yearly and quaterly financial reports for the past years. Many financial websites will provide you informations such as stock price, earning per share P/E ratios and so on.
Benjamin Graham once said that to consider a stock undervalued, its stock price must be at least 1/3 below its intrinsic value, here are some basic assumptions that will help you to determine if a stock is undervalued.

Some of the basics of Value Investing:

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  •  As we said the stock price should not be higher than 2/3 of the intrinsic value.
  •   The P/E ratio should be the lowest possible, if you look at a whole industry the stock should be in the lowest 10% of all the stocks to be considered as undervalued
  • Price Earning to growth ratio (PEG) should be lower than one.
  • Stock price should be less than the tangible book value of the firm
  • Debt To equity ratio should be lower than 1, meaning that the firm using less debt than equity.
  • Current assets of the firms should be twice the current liabilities.
  • The dividend yield should be at least 2/3 of the long term best rated bond of the country where we pick the stock.
  • Earning growth should be more than 7% over the last 8 to 10 years.

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    1 comments:

    Samir Khan said...

    I typically use several tools to find the "fair" value of a stock, and make a buy/sell/hold decision based on an analysis of all fo them. The method I currently use is outlined here.

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