When investing in the stock market one is always on the look out for the best deal. What can they buy low in order to sell high later and make a profit, this is why people invest right? To find these types of investments smart investors turn to undervalued stocks.
Undervalued Stocks are stocks whose current market price is under what its value should be. It could be a good solid company that has had some bad press recently and because of this, their stock price fell. Stock price could have also fallen because of a drastic selling trend of all stocks and could have nothing to do with the company itself.
An example of this would be the Walt Disney Company; Disney stock price plummeted with everyone else’s at the end of 2008. By March of 2009, their stock was selling at just 15.99 a share (http://finance.yahoo.com), almost exactly one year later their stocks were back up to over 32.00 a share. Anyone that would have invested in this undervalued stock with this solid performing company in the spring of 2009 would have doubled their money in a year.
If a stock has a low P/E (price to earnings ratio), price to book ratio and price to cash flow ratio it will flag investors that people are not excited about this stock. It also signals that this stock is possibly an undervalued stock. Before investing however, check the last five years worth of these ratios to find if this is a good buy from a normally solid company or if this is a company that is slowly going out of existence.
Another way to determine if a stock is undervalued but a good investment is by looking at its EBITDA multiples (earnings before interest, taxes, depreciation and amortization). To put it simply EBITDA is a look at the company’s profits.
All of these factors can help you find stocks that are undervalued and possibly a good investment.
