How do we identify undervalued stocks ?

Question

I would like to invest for long term in Indian stocks. I would like to know, how to identify undervalued stocks. is there any formula or procedure to find them

Answer 1

I regret to say that I do not think that currently there are any undervalued Indian stocks. At least none that I am aware of. There might be some in a few months if the correction continues.

Steps to take:

Look at the projected growth rate of the company and the PE ratio at which it is selling. If the PE ratio is less than the projected growth rate, it might be undervalued.

Look at the balance sheet. How much debt vs equity does the company carry. If the debt is more than 1/2 the equity, the company may have problems.

Look at the sales figures for the company. Are sales increasing at a rate greater than or equal to the earnings growth rate?

Consider the industry that the company is in and compare it to other companies in the industry. Is its growth rate better than its competitors? Is is a leader in its industry sales and earnings wise?

Does the company pay a dividend? That adds to the stability of the price of the stock but it does nothing to determine if it is undervalued or not, but stocks that pay dividends are worth somewhat more relatively speaking than stocks that do not.

Are the executives overcompensated? Are they working for the company for for their own benefit?

Answer 2

The only way to know if a stock is undervalued is to go into the future and see if the price is higher at some point. There's no magic valuation formula and if there was, everyone would use it and no stock would be over or under valued. The whole idea of an undervalued market goes against market efficiency, and if the market is inefficient, then why would you ever want to buy into it? An undervalued asset would stay undervalued forever.

However, you do want to buy value stocks, as defined by low book value. Value stocks do outperform growth stocks, just as small stocks outperform large stocks. This was established by Fama & French in the three factor model. You can exploit this through stock picking, but are better off using an index.

Answer 3

Hello,

to determine if a stock is undervalued,

find the cost of a company ex. IBM might be worth 1 billion

then take the outstanding shares and divide them into the companies worth in this case 1B

then look at the stock price on the open market, and if the stock listed as the current price of the company is lower than what I just explained, the stock is characterized as undervalued

Answer 4

First, we need to understand that price doesn't equal value. Price is what we pay. Value is what you get. We call a stock is undervalued, among other reasons, when its value exceeds its price. Secondly, we need to understand that value is subjective while price is objective. Whether a stock worth $10 is expensive or not really depends on individuals judgement. How to assess value? Remember, value is what we get. If you thing you can get what you want by investing in a particular stock, all you need to do is to see if the price is reasonable. Just like when you go out to buy LCDs. You like the quality, and you look at the price. After that, you ask yourself 'is it worth it?'

Answer 5

there are different strategies... depends.. the whole science or study of identifying undervalued stocks and investing in them is called Value investing, pioneered by Graham and Dodd. read the wikipedia article to know more. the article is: http://en.wikipedia.org/wiki/Value_investing


Jaleel Mohammed Jalaludeen
http://investingindians.blogspot.com

Answer 6

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Answer 7

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Answer 8

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Answer 9

PSR Price to Sales Ratio

http://www.wallstraits.com/school/sage_valuation2.html

My stock of the year 2007 "PBLS " PSR is .005

Should be at $1.38 compared to TXI = PSR Comparison
Selling at .0175 because they have not filed in 10 years.
PBLS has recommitted to shareholders to file the form-10
in early 2007
http://www.pbls.biz/pressrelease_content.asp?prid=82


Dont be lazy
Do the research !!

Jockee

Answer 10

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