Look Into Undervalued Stocks

There are two common instances for a stock to become undervalued. The first one is when a stock “goes on sale”. The second is when the stock of a company is generally undervalued based on its business outlook.

Generally, a stock can go on sale during a market downturn. For example, the market crash in 2008 had a negative impact on many stocks, even those not directly related to the financial crisis. As a result, most investors got pessimistic. They avoided investing any more money into the market, despite the opportunity to snap up great companies at unreasonably low prices. It is here that some major returns can be generated from companies that will most likely survive the hard times.

Investors can also become pessimistic on a stock without a general economic depression. For example, a disappointing earnings report may send prices tumbling. Yet if the company still has a promising outlook for the future, this may present yet another lucrative buying opportunity.

Sometimes, however, a company can be undervalued on its own. Generally, this is determined by looking at the company’s future prospects. A key way of doing this is to look at a company’s forecasted revenues and expenses. This is known as a discounted cash flow analysis, which means taking a company’s future cash flow and discounting them back to its present value — what that future money is worth today. Theoretically, the sum of these values is their price target. As such, if the current price is under this target, then this company is likely a good buy.

Another good way to determine if a company is undervalued is to compare a stock’s price-to-earnings ratio versus its direct competitors. This can help you determine if the company is cheap compared to its rivals. Oftentimes, if you see a big jump in the price of one company in an industry, it likely means that its rivals will eventually catch up, unless they truly have a distinct and sustainable competitive advantage that makes them truly unique.