Here's How to Tell if Stocks Are Undervalued (2024)

The eternal mantra of stock investing is to "buy low and sell high." And every day, millions of stock brokers and traders -- from professionals to armchair day traders -- try to do just that.

But how do they do it? How do they tell when a stock is undervalued enough to offer a chance at profit?

A good bit of it is luck (and maybe instinct). There's undeniably an element of right place, right time when it comes to profiting off the stock market. Yet there's also an art and, yes, a bit of science to it, as well.

That is to say, there are a few common telltales of an undervalued stock. If you can understand why and how stocks become undervalued, you can potentially use these signs to find them on your own.

Understanding what makes a stock undervalued

When you buy a stock, you pay the current share price. That's the value the market has given that stock at a given moment.

The share price isn't always indicative of the actual value of that stock, however. Some stocks are considered to be overvalued, while others are undervalued.

There are a few reasons a stock isn't trading at its perceived value:

  • Demand: If a stock is popular -- or has lost popularity -- demand could be unusually high or low, impacting the share price in a way that isn't congruent with the perceived value of the stock. (A good example here may be the so-called retail or meme stocks like AMC and GameStop.)
  • Headlines: When a company makes headlines, their share price can be impacted. If those headlines are for the wrong reasons, their share price could drop below its perceived value.
  • Reactions: The market can often be quite reactive. Investors may over or under react to certain news, like quarterly reports missing expectations.
  • Speculation: A big part of investing is trying to predict the future. When investors think a company has a good potential for growth in the near (or even long) term, the stocks may become overvalued. But if the company's future is in question, the stocks could become undervalued.

Essentially, anything can impact the share price and value of a given stock. Markets are fickle, and any stock can become overvalued or undervalued.

Identifying undervalued stocks

Since undervalued stocks can come from any industry and any company, actually spotting them in time to profit off them can be tricky. Here are a few tips from experts on how to find them.

Stick with what you know

Identifying undervalued stocks relies in large part on accurately valuing the stock to begin with. If you don't know anything about the industry or company in question, it'll be next to impossible for you to accurately value the stock.

For example, if you don't know much about the auto industry, you'll probably lack the background knowledge needed to guess if that niche electric car company has a bright future -- or a dim one. And you'll probably want at least some knowledge of the energy sector before you try to evaluate that solar panel company.

Crunch the numbers

There are a lot of various metrics used to value companies and stocks. Here are just a few to know about when looking for undervalued stocks:

  • Price-to-earnings (P/E) ratio: This is the stock's current share price divided by its annual earnings. A low P/E ratio could be a sign that a stock is currently undervalued.
  • Price-to-book (P/B) ratio: This is the stock's current share price divided by its equity per share (which is based on the company's assets). A low P/B ratio could indicate an undervalued stock.
  • Earnings per share (EPS): This is a company's profit divided by its outstanding shares of common stock. A high EPS tends to indicate a more profitable company.
  • Return on equity (ROE): This is a company's net income divided by the equity held by shareholders. This is a way to measure the company's return on net assets, or how well it's using its invested capital. A high ROE tends to indicate a more efficient company.

Dig into the company

As we went over in the previous section, there are a lot of reasons a company's share price can be different from its perceived value. And many of those reasons aren't as easily quantifiable as we may like.

So, go beyond the math. Look at the industry, the company, the headlines, and the employees. Any and all of these can provide key information for valuing a company.

For example, are people within a company buying up a lot of its stock? That could be a sign that they think it has a lot of value. And they may know better than those looking from the outside, in. On the other hand, if everyone is selling shares and fleeing -- that could be a sign of trouble to come.

Predicting the future comes with risks

No matter how much information you dig up and how many numbers you crunch, there's always going to be risk inherent in trying to predict the future of any stock. While there can also be a lot of rewards to correctly picking an undervalued stock, you need to weigh your own risk tolerance.

So, while it's perfectly fine to try and find the next big stock, be smart. Don't be unnecessarily risky with, say, your retirement funds.

What I like to do is keep a separate investment account for playing. It's this account that I use when I want to trade individual stocks or follow an investment hunch. At the same time, my retirement funds are resting comfortably in a separate IRA where they can continue to grow, slow and steady.

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Here's How to Tell if Stocks Are Undervalued (2024)


Here's How to Tell if Stocks Are Undervalued? ›

Price-to-book ratio (P/B)

How to find out if a stock is undervalued? ›

The P/B ratio can help you compare the market price of the stock to its book value (company equity divided by number of shares). A stock may be considered undervalued if the P/B ratio is less than one. The current ratio can help you determine a company's ability to pay off its debts.

How do active investors identify undervalued stocks? ›

Price-to-Earnings Ratio:

The P/E ratio measures a company's current share price relative to its earnings per share. A low P/E ratio signals an undervalued stock since investors assign little value relative to profits. Compare P/Es within sectors to find discounted stocks with upside to mean ratios.

How do you know if a stock is fairly valued? ›

The PEG ratio accounts for a company's growth prospects. In general, a PEG of 1.0 indicates a fairly-valued stock. PEGs under 1.0 are thus considered to be potentially undervalued and above 1.0 potentially overvalued.

What is considered undervalued stock? ›

Undervalued is a financial term referring to a security or other type of investment that is selling in the market for a price presumed to be below the investment's true intrinsic value. The intrinsic value of a company is the present value of the free cash flows expected to be made by the company.

What is the most undervalued stock? ›

10 Most Undervalued Value Stocks To Buy Now
  • Aptiv PLC (NYSE:APTV) Number of Q4 2023 Hedge Fund Shareholders: 39. Trailing P/E Ratio: 7.19. ...
  • Lantheus Holdings, Inc. (NASDAQ:LNTH) ...
  • Lamb Weston Holdings, Inc. (NYSE:LW) ...
  • Valaris Limited (NYSE:VAL) Number of Q4 2023 Hedge Fund Shareholders: 47.
Apr 13, 2024

What are the most overvalued stocks right now? ›

Most overvalued US stocks
SymbolRSI (14)Price
FEXD D93.0211.40 USD
LABP D90.5322.31 USD
MCAC D88.6911.24 USD
AQU D86.3611.00 USD
29 more rows

What is the best indicator for undervalued stocks? ›

Price-to-earnings ratio (P/E)

A low P/E ratio could mean the stocks are undervalued. P/E ratio is calculated by dividing the price per share by the earnings per share (EPS). EPS is calculated by dividing the total company profit by the number of shares they've issued.

How to know if stock is undervalued or overvalued? ›

Price-earnings ratio (P/E)

A high P/E ratio could mean the stocks are overvalued. Therefore, it could be useful to compare competitor companies' P/E ratios to find out if the stocks you're looking to trade are overvalued. P/E ratio is calculated by dividing the market value per share by the earnings per share (EPS).

Is Apple stock undervalued? ›

Fair Value Estimate for Apple

With its 2-star rating, we believe Apple's stock is overvalued compared with our long-term fair value estimate of $160 per share.

What is the most accurate indicator of what a stock is actually worth? ›

Price-to-Earnings Ratio

In short, the P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings. The P/E ratio is important because it provides a measuring stick for comparing whether a stock is overvalued or undervalued.

How to check if a stock is fundamentally strong? ›

Earnings per Share (EPS) is a metric that tells us how much profit a company generates per share. It is calculated by dividing the company's total profit by its total number of shares. EPS helps us understand how well a company is performing, and generally, a higher EPS indicates a relatively strong company.

How to tell if a stock is oversold? ›

An RSI level of 30 or below is considered oversold. As the number of trading periods used in an RSI calculation increases, the indicator is considered to more accurately reflect its measure of relatively strong or weak moves. An RSI setting to use 14 days of data is more compelling than a setting of only seven days.

How long can a stock stay undervalued? ›

Stocks Can Stay Undervalued for a Long Time

In fact, undervalued stocks can stay that way for months or years – as long as it takes for the market to fully appreciate a company's potential. So, value investors need to be patient.

Should you buy a stock when it is undervalued? ›

Advantages of Undervalued Stock

It presents an opportunity to purchase shares at low prices from well-established or promising companies. These stocks also feature low risk due to the fact that such undervaluation is cyclical and the company has the potential to attain its intrinsic value.

Will a stock go up if it is undervalued? ›

What happens when a stock is undervalued? Ideally, it's more likely to experience future growth, which could mean capital gains for investors depending on their individual cost basis (or buying price). When a reliable analyst suggests a stock may be undervalued, their opinion could be worth listening to.

How to know if a stock is undervalued or overvalued? ›

Price-earnings ratio (P/E)

A high P/E ratio could mean the stocks are overvalued. Therefore, it could be useful to compare competitor companies' P/E ratios to find out if the stocks you're looking to trade are overvalued. P/E ratio is calculated by dividing the market value per share by the earnings per share (EPS).

How to determine if a stock is undervalued or overvalued CAPM? ›

A critical aspect of CAPM is the concept of undervalued and overvalued securities. If the rate of return is greater than the expected return, it would be considered an overvalued security. If the rate of return is less than expected returns, it would be regarded as undervalued security.

How to know if the stock is overvalued or undervalued by beta? ›

Beta is an input into the CAPM and measures the volatility of a security relative to the overall market. SML is a graphical depiction of the CAPM and plots risks relative to expected returns. A security plotted above the security market line is considered undervalued and one that is below SML is overvalued.

What PE ratio is undervalued? ›

In general, if the company's current P/E is at the lower end of its historical P/E range or below the average P/E of similar companies, it may be a sign that the stock is undervalued—regardless of recent business performance.


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