5 Undervalued Stocks You Don’t Want To Miss
A s an investor, you should look for new investment strategies that can help build your portfolio and give you the most profit in the long run. If you have the patience to wait for them to pay off, consider purchasing undervalued stocks. Understanding this type of investment allows you to determine if it’s the right investment strategy for you. Use this guide to help you learn more about undervalued stocks and the five best undervalued stocks to consider.
- An undervalued stock refers to a stock, security, or investment that has a share price far below what’s considered to be its intrinsic value.
- No matter the industry or sector, there are several undervalued stocks you can invest in.
- Undervalued stocks offer a higher yield, lower risk, and a high rate of return without having to succumb to debt.
- Despite its advantages, investing in undervalued stock is time-consuming, relies too heavily on your own analysis, and doesn’t offer much clarity when it comes to whether or not a stock will appreciate.
What Is an Undervalued Stock?
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Whereas an overvalued stock has a price that’s higher than its perceived value, an undervalued stock refers to a stock, security, or other investment that sells at a price well below its presumed intrinsic value. The intrinsic value refers to the asset’s worth, which is measured through a calculation or financial model instead of using the current market price.
For example, let’s say that a stock has a price of $100, but it’s worth $200 based on anticipated future cash flows. That makes this stock undervalued since it is worth more than its selling price. Now, let’s say a company’s stock is valued well below the industry average. This stock may be considered undervalued, as well. When this happens, value investors may put their efforts into purchasing these investments to bring in reasonable returns for a lower initial cost.
What Is Value Investing?
Value investing is an investment strategy that searches for undervalued stocks or securities to buy or invest in. Investors hope to improve their chances of getting a return thanks to the stock’s relatively low cost. Overall, this investment strategy avoids overvalued stocks as they can yield an unfavorable return.
Value investing may also refer to the idea of investing in companies based on an investor’s personal values. Using this strategy, investors use their values to guide their investments despite market indicators that may not show a position as profitable.
Advantages of Investing in Undervalued Stocks
One of the main (and obvious) advantages of investing in undervalued stocks is that it gives you the chance to purchase stocks at a lower price from well-established companies or those with a promising future. Here are some additional advantages of investing in undervalued stocks:
- High rate of return without debt: When you invest in an undervalued stock, you get a stock with an unjustifiably low price/earnings (P/E) ratio. This results in excessive future returns. Beyond P/E ratio expansion, you end up getting a greater return rate than the return that the business itself earned on your behalf as an investor.
- Higher yield: With an undervalued stock, you can buy more shares, which gives you the opportunity to receive more dividends. This is because dividends are distributed based on the number of shares you own. In addition, the current yields are highest when you have a low valuation.
- Lower risk: Since undervaluation is cyclical and a company can still obtain its intrinsic value, investing in undervalued stocks offers fewer risks.
Drawbacks of Investing in Undervalued Stocks
Though several advantages come with investing in undervalued stocks, there are also a few risks to consider. Here are some of the drawbacks that come from this type of investment:
- Unknown appreciation: There’s no way to know if or when a stock that seems undervalued will ever appreciate. In other words, you never know if the stock will increase in value from the moment you purchase it.
- Potentially flawed analysis: Since there’s no way to determine a stock’s true intrinsic value; it’s ultimately up to your analysis and evaluation. Because of this, it’s important to consider several factors that may indicate an undervalued stock and assess accordingly.
- Time-consuming: Since undervalued stocks need time to show what they’re truly worth, these stocks aren’t optimal if you’re looking for a short-term gain. Investing in undervalued stocks takes patience and exhaustive research all around.
How To Identify Undervalued Stocks
T o evaluate an undervalued stock, you need to look at a company’s financial statements and fundamentals. This means looking at figures like its profit generation and cash flow to help determine the stock’s true intrinsic value.
Whether or not a stock is considered undervalued is ultimately up to you, though. Fortunately, several indicators can label a stock as such. Analyzing these fields and other related factors and metrics can help you determine whether a company is undervalued. Here are some common indicators of undervalued stocks:
- Low P/E ratio: When a stock has a high P/E ratio, it often has a higher price relative to its profit. Therefore, it’s a safe bet to use this ratio to find the best deals. Search for a low P/E ratio when looking for undervalued stocks.
- Low P/E growth (PEG) ratio: If you’re looking for an even more accurate measurement than the P/E ratio, try the PEG ratio. To use this ratio, divide the P/E ratio by the earnings growth rate. If the ratio is less than one, investors may rely more on a stock’s past performance than its potential for future growth.
- Underperformance: If a company has a lower share price compared to others in its industry, it may indicate an undervalued stock. If you use a screener, compare individual stock prices through history to help you.
- High-dividend yield: If a company has a higher dividend payment rate than its competitors, the share price may be considered undervalued relative to its dividend payment.
- Low book-to-market ratio: Simply put, this ratio compares a company’s book value to its market value. To determine a low book-to-market ratio, you need to understand the value of tangible and intangible assets. This is because a stock’s price may not reflect any of a company’s underlying asset values.
- Free cash flow: Free cash flow refers to the cash a company earns after it has accounted for its expenses. If a stock has lower reported earnings and, therefore, a lower price, it may offer you a good deal when it comes to cash flow. Use the cash/share ratio to determine how this indicator comes into play.
Other indicators of an undervalued stock include a company’s earning history, its credit rating, and its profit or loss during the most recent recession.
Best Undervalued Stocks
When you look for undervalued stocks, you’re essentially searching for quality securities that have performed well and have enough momentum.
If you’re looking for value and income in the stock market, consider adding the following undervalued stocks to your portfolio:
Founded in 1994, Albemarle Corporation creates, manufactures, and markets specialty chemicals for several industries, such as pharmaceuticals, consumer electronics, construction, and packaging. Stocks in the agricultural and chemical industries hold plenty of value for investors today. One reason for this is the favorable weather this time of year, which allows crops to flourish.
Founded in 1963, this worldwide media and technology corporation offers several services through its various sectors, including cable communications, theme parks, and filmed entertainment. Comcast Corporation’s cable communications sector, for example, provides cable services like high-speed internet and video, which are distributed to a variety of residential and business consumers through its Xfinity brand.
When it comes to the communication services sector, television and tech companies are a safe bet with a wealth of opportunities. Despite the decline of traditional television, older consumers and sports fans help maintain the industry’s stability.
As the largest communications company in the U.S., AT&T is a good option if you’re looking for an undervalued stock. Though it’s not immune to a national crisis, it continues to post reliable metrics in its wireless sector, in particular. It has even made significant purchases to diversify its business, including the purchase of Time Warner in 2018 and DirecTV in 2015. It’s also worth mentioning that AT&T has nearly four consecutive decades of dividend growth. Compared to the historical average, its shares are considered undervalued.
Prudential Financial Inc.
Founded over 140 years ago, Prudential Financial Inc. provides both life insurance and investment management services to several companies worldwide. It has raised its dividend for 12 years in a row and offers desirable shares in terms of both yield and valuation. Not only does it trade at a lower stock price than its peers, but the price itself is rather volatile. This means that you have more opportunities to buy since the price could move in either direction in the future.
W.P. Carey Inc.
As one of the largest real estate investment trusts in the world, this well-established company operates over 1,200 single-tenant properties. With properties in the U.S., Europe, Canada, Japan, and Mexico, its worldwide reach has helped it achieve 23 years of dividend growth. Additionally, the stock raises its dividend every quarter by a small amount. W.P. Carey Inc. offers a high dividend yield and a good price compared to the greater market.
As you can see, several stocks trade below their historical valuation. If you’re patient enough and make wise evaluations, this investment may prove worthwhile and rewarding.