When choosing stocks to invest in, it is important to know the real value of the stock. You never want to invest in overvalued stocks. Instead, investing in undervalued stocks could bring you a lot of profit. How do you find them? Find out the 6 indicators below!
Start from the basic: low price-earnings ratio
Calculating P/E ratio is probably the most common way to find out the worth of stock. Quite literal from the name, the formula is really easy to work out. You just need to divide the P with E, and you get the P/E ratio. The P symbolizes a company’s stock price, while E is its annual earnings. The P/E ratio translates to how much P/E ratio in dollars will investors spend for every 1$ of the company’s earnings.
Investor Junkie suggests a lower P/E ratio as a buying opportunity. However, amateur investors might need to keep themselves on guard. Professional investors who have been examining certain companies can know when they are not publishing the truth. This leads to a lower stock price, yet riveting P/E ratio. Fortunately, such scenarios are likely to be seen. Hence, relying on the P/E ratio can be a quite trustworthy and helpful strategy.
More signs on undervalued stocks: plunging relative price performance
Another way to find out the worth of a stock is by comparing it to its industry peers. A lower share compared than its peers’ may signify an underperformance. While there are various reasons contributing to a downsized share price, Investor Junkie notes one common reason: stock analysts’ action. Stock analysts may at times doubt certain financial metrics. Accordingly, notable columnist on major media may cause a whiplash effect which leads to investors sell-off, and ended in plunging shares price. However, if the shares drop way too far, then this is a clear sign of undervalued stocks.
Investor Junkie also recommends comparing individual stock price histories from several periods of time against various individual stocks and against stock indexes. To compare this, investors can use the help of stock screener tools.
Dig deeper information: finding out the price/earnings growth ratio to determine undervalued stocks
Rather than price to earnings (P/E), price/earnings growth (PEG) is often considered to be more accurate. To figure out the PEG, simply divide the P/E ratio by the “earnings growth rate.” A ratio of less than 1 signifies that investors might be focusing more on past performance instead of growth opportunities. Nevertheless, Investor Junkie warns investors to keep in mind that growth projections are, at the end of the day, only projections.