How to Find Undervalued Stocks for Investment
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An undervalued stock is a good business that the market is pricing below what it is worth. You find one with three checks, in this order: the business, the people running it, and the numbers. The price comes last. On its own, a low price proves very little, because plenty of stocks are cheap for a good reason.
To be a successful value investor in the stock market, you need to know how to identify which stocks are the most valuable. But the most valuable stocks aren’t necessarily the ones that are performing the best. In fact, the real goal is to find stocks with strong intrinsic value that are currently under valued by the market. So how do you identify these gems?
First, find the right type of business.
In general, you should always start with what you know. For instance, if you’re familiar with the technology sector, you may want to look there. Just make sure that the industry isn’t experiencing long term challenges. This will help you avoid eroding profits in the future.
Next, look for a company with a strong and sustainable competitive advantage. For instance, if a company has a patent on an emerging technology, this could help them for years to come. Finally, make sure the company has strong growth potential and a clear strategy for the future. Is there a growing demand for their product? Do they have the infrastructure necessary to expand?
Questions like these can help gauge their future success.
The second way to identify intrinsic value is to study a company’s management team.
Do some research.
See if they have the proper credentials and whether their skill sets suit the current business climate. And of course, look at their track records. Were they successful in their recent positions or did they leave those companies weaker than before? And, are they transparent with their shareholders? Executives who are open to new ideas and willing to adapt are generally more capable of overcoming future challenges.
Next, have they laid out a clear plan for future growth? If they have not, that is a warning sign. And how are they paid? Do they receive a flat salary or is it performance-based? And do they own a significant stake in the company? Executives who are themselves invested in their company’s success are more likely to put their shareholders first.
The third and final way to identify intrinsic value, is to analyze the company’s financial numbers.
That takes more room. So it gets two posts of its own: How to Read Stock Financial Statements, and then Shortcuts to Analyzing Financial Ratios for Stocks.
The stock valuation series: 1. How to Find Undervalued Stocks for Investment · 2. How to Read Stock Financial Statements · 3. Shortcuts to Analyzing Financial Ratios for Stocks · Going deeper: Book Summary: The Intelligent Investor by Benjamin Graham · The Little Book That Beats the Market Summary (Greenblatt’s magic formula)
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Educational content only, not personalised financial advice. Trading carries risk, including loss of capital. Past performance is not indicative of future results. Synapse Trading is not licensed or regulated by MAS.
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Educational content only, not personalised financial advice. Trading carries risk, including loss of capital. Past performance is not indicative of future results. Synapse Trading is not licensed or regulated by MAS.
