Investors action determine the value of stocks. Sometimes, some stocks may get overvalued, while some others get undervalued. Continuing on the previous article, here are 3 more indicators to find out undervalued stocks.
Determining the value of a stock through its dividend yield
The dividend yield is simply how much a company gives money to dividends periodically. According to Market Index, companies have two choices to take regarding their profits: to focus on “growth”, or “yield”. Focusing on growth means a company will allocate more of its profits on future growth instead of dividends. On the other hand, companies on “yield” give more on the dividends. However, this does not mean the company is not interested in future growth. Well-established companies commonly focus on yield as they do not urgently need to upgrade things.
Investor Junkie further suggests that stocks with comparably high dividend yield to other peers in the same industry might signify the stocks are being undervalued. The prediction is even more accurate on financially stable and secure companies. Companies with higher dividend yield can bring more returns in short term and have the potential to grow their stocks higher in the future.
Low market-to-book ratio: more chance of stocks being undervalued
The market-to-book ratio calculates a company’s market value on its book value. The market value is the company’s present stock value. Meanwhile, the book value represents the fund a company owns when it liquidates all its assets and repays its liabilities. How is this an important point to consider?
Let us take Investor Junkie‘s example: a toy producer company. While its business operation might not be performing well at some time, think of the assets they own. Unfortunately, investors often overlook this point. Start looking at the market-to-book ratio. A lower ratio might be a sign for undervalued stocks.
Checking on free cash flow to find undervalued stocks
Free cash flow is the amount of fund owned by a company after deriving expenses used to support operations and maintain capital assets. Different from earnings or net income, free cash flow calculates profits by excluding non-cash expenses.
Investopedia notes that free cash flow can signify a company’s value and health. Similarly, Investor Junkie mentions that at times, low-priced stocks with lower reported earnings might, in fact, own a favourable cash flow. Bear in mind to always compare the cash flow with other companies of the same position. This will help you get to know better the real value of the stocks. Some signs might lead you to undervalued stocks, while some others are simply not worthy stocks to invest in.