Hot Tips Regarding Undervalued Stocks

If the old adage on Wall Street is to buy low and sell high, then it would stand to reason that you would always want to buy a stock that was undervalued. Because if it was overvalued, then you would lose money when you sold it. While the thought process behind investing in the stock market seems simple enough, in truth finding those truly undervalued stocks is where the real money is made, as there are many investors who thought they were buying value stocks, only to learn the harsh reality that they had overpaid.
Price to Earnings
Check the price to earnings ratio of a stock. When investing in the stock market, you want to compare apples to apples. Many investors think if one stock is selling at $4 per share and the other stock is selling at $40, then the higher priced stock must be better. That is not necessarily so. To compare apples to apples, investors use something called a price to earnings ratio. This is the current price of the stock, divided by their quarterly earnings per share. For instance, if a stock is trading at $25 and it has $1 per share of earnings, then it is trading at a p/e (price to earnings) of 25 (25/1). If a competitor of that stock is trading at $75 per share and has $2 per share in earnings, then the p/e ratio would be 37.5. In this case, the cheaper stock actually has a lower p/e. The lower the p/e, the more attractive the stock. It should be noted that different sectors trade with different p/e ratios. For instance, a p/e ratio of 20 may be common in a certain tech sector, while a p/e ratio of 50 may be common for micro pharmaceutical stocks.
Cash on Hand
When companies get off the ground, it is no secret that many of them need to incur debt. However, those companies who incur too much debt without creating any revenue will most likely go out of business. Think of a consumer who charges too much on their credit card, and then has no hope to pay it back. Look on the balance sheet of a company that you think is undervalued and determine the debt to equity ratio they have on their books. The lower the debt and higher the equity, the better chance the company has to make it through the lean times and come out on the other end stronger. The amount of debt to equity that a company should have depends on the growth model as well as the sector. Again, compare companies that are selling similar products to similar markets.
Revenue Growth
Sometimes the stock price of a company can get hit hard because of a piece of bad news or a bad quarter. However, when searching for hot undervalued stocks, look to companies that have produced consistent strong growth quarter after quarter. That way you can decide if the bad quarter was an isolated incident (perhaps a natural disaster struck their plant) or the company is actually in real trouble (maybe the Food and Drug Administration has banned their drug.) Find a company that is down on its luck but not down for the count by tracking the revenue growth from the balance sheet.
Stock Screeners
You might be thinking that keeping track of all of these little numerical figures for a myriad of companies may seem completely overwhelming. Enter the stock screener. A stock screener is a tool that many investment brokerages offer. Also, many financial-based websites will allow you to build your own stock screener on their respective sites. You can plug in different variables such as p/e ratio parameters, price parameters, sector parameters and more. This will then populate a list of stocks where you can do further homework to pick the hot undervalued stocks that you want to purchase for your portfolio.
A dividend is a payment made by a company to their investors based on the company's earnings. The amount of each dividend is approved by the board of directors. When looking for undervalued stocks, look for stocks that pay a decent dividend. That way, while you are waiting for the undervalued stock to become overvalued so that you can sell it and make money, you are being paid to wait. For instance, if a company offers a dividend of $1 per share per quarter and you have 100 shares, you will collect $400 from the company, just for being an investor over the course of a year.


Investor Trip: Use Stock Screeners to Find Undervalued Stocks; Dec. 16, 2006
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