Undervalued stock
An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value.[1] For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock. The undervalued stock has the intrinsic value below the investment's true intrinsic value.
Numerous popular books discuss undervalued stocks. Examples are
Determining factors
Morningstar uses five factors to determine when something is a value stock, namely:
- price/prospective earnings (a predictive version of price/earnings ratio sometimes called Forward P/E.)
- price/book
- price/sales
- price/cash flow
- dividend yield
- The company's earning history is stable.
- The company does not specialize in high-technology that can become obsolete overnight.
- The company is not in the middle of some financial scandal.
- The company's low PE ratio is not due to profits realized from capital gains.
- The company's low PE ratio is not due to a major decline in profitability.
- The company's PE ratio is below its average PE ratio for the last 10 years.
- The company is selling at a price below its tangible asset value.
- The company's trailing 3-years earnings has risen over the past 10 years.
- The company's credit rating is AAA, AA, or A, or even better, there is no rating because there is no debt at all.
- The company did not have a loss during the last recession.
- The company's PEG ratio is low. A Price/Earnings/Growth rate below 1 means the PE ratio is less than the growth rate.
An excellent stock at a fair price is more likely to be undervalued than is a poor stock at a low price, according to
See also
References
- ^ Chappelow, Jim. "Undervalued Definition". Investopedia. Retrieved 2020-10-09.
- ^ Warren Buffett's 1989 letter to Berkshire Hathaway shareholders