Every investor or trader have searched for the best types of investment strategies once in a while. There are many compelling investment strategies in the market. The "best" investment strategies for every investor differs based on their preference of time frame, risk tolerance, and many other factors. One of the finest approaches is to identify "undervalued stocks".
So, what are undervalued stocks?
Undervalued is referred to as an investment where the selling price is considered to be lower than the true investment's value. It can be judged by analyzing the company's financial statements and analyzing its fundamentals, such as return on assets, cash flow, profit retention etc. This is also known as a value investment strategy. Buying an undervalued stock has been one of the primary components of Warren Buffett's stock selection.
How to find undervalued stocks?
There are a few major indicators that might help you identify an undervalued stock.
- Low price/earnings ratio: A low P/E ratio is a good indicator when it comes to identifying an undervalued stock. The higher the P/E, the higher is the stock price relative to earnings whereas a lower P/E is a good buying opportunity. The P/E ratio can be calculated as Market Value per Share / Earnings per Share.
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Low price/earnings growth ratio: A PEG ratio is considered to be more accurate as it involves the “earnings growth rate.” It is calculated by dividing the P/E ratio by the earnings growth rate. If it is below 1 it is expected that investors are focusing on past performance rather than growth opportunities in the near future. However, they are just "projections".
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High dividend yield: A dividend yield helps in identifying how much dividend a company pays in a year in relative to its stock price. So, if the dividend payment rate is considerably more than its competitor it might be considered to be an undervalued stock.
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Even though an undervalued stock does not necessarily mean that it will give good returns in the near future. There is no way to make a correct prediction to judge the movement of the stock by looking at the intrinsic value, it is just a well-educated guess.
Submitted July 16, 2018 at 07:55AM by indianleo https://ift.tt/2KYj2r5
