If you’ve never thought about that, then now is the time. Making profits from our trades have always been our first priority. As far as I’m concerned it’ll always be our first priority.
But, what are you currently doing to make profits in your trades? In order words, what’s your strategy?
If you do have a strategy that’s working for you for the most part, then you shouldn’t be reading this post. But if your strategy isn’t working the way it should, or if you don’t even have a set strategy, then this is your post.
As there are so many strategies an investor can use to trade stocks, finding undervalued stocks to trade is just one of them. With that being said, you can either use or not it, it’s up to you to know which strategy you want to use.
I’m going to talk about 4 steps for finding undervalued stocks to make lots of profits. Hopefully by the end of the post you’ll feel like you’ve learned many things you didn’t know before.
Let’s get at it, shall we?
What are undervalued stocks?
Here’s how this term is defined:
As a financial term referring to a security or other type of investment that is selling for a price presumed to be below the investment’s true intrinsic value.
When you buy a stock that’s undervalued you have more chance to make a profit. The reason is because it’s not currently traded at its intrinsic price, which gives it the opportunity to be more favorable for an uptrend.
However, there are other aspects to consider before you buy an undervalued stock. We’re going to elaborate on them throughout of this post.
When does it make sense to invest into undervalued stocks?
Undervalued stocks may sounds good to you anytime you hear of them, but some of them may not worth your investment. Before you put your money into a stock which you find to be trading under its value, you’ll need to look a little further for some more information.
Financial situations should be looked at, it’s very important. A stock may look like it’s selling at an undervalued price while in reality that’s its current real price. So before you go ahead and invest into a stock that looks to be undervalued, look some more into it.
In other words, confirm that it’s what you’re seeing.
How to find an undervalued stock?
In the stock market world, it’s called value investing. But how do investors look for stocks when using such a method?
These steps bellow could be helpful to you for this purpose.
1- Price/earnings ration (P/E): When looking for the value of a stock it always makes more sense to start by checking its price/earnings ratio (P/E). This ratio tells a lot about a stock and most of the times this specific ratio can actually help you to make profit or not to loose your money.
For example, if the representative P/E ratio in a sector is 30 and you find a stock trading at 20, this should prompt you to look into it further.
Once you’ve checked the financials and found that they’re relatively comparable to the competitors, then you may start thinking about acquiring some shares.
2- Debt-to-Equity ratio < 0.5
It’s safer to look for stocks that have a debt to equity ratio that’s less than 0.5. What does that really mean?
It means that companies with this ratio don’t owe too much money; their debts aren’t as high as compared with many other companies that have some very higher numbers in debts.
It’s something that you really have to look out for when a stock is currently trading under its value. If this number is found to be unfavorable, this should be a red sign.
3- Current ratio of the stock
Try to look for stocks that have a current ratio that’s greater than 2. This should be the lowest number to look for. Most of these steps would require you to use a stock’s screener. I’ve written a post about some of the best stock screeners you can use free of charge.
4- Earnings yield
Earnings yield is basically the inverse of a stock earnings multiple. In other words, the earnings are multiplied and then 1 is divided by the product of this multiplication.
To make it even clearer to you, let’s put it into an example. Let’s say company XYZ has earnings of multiple of 2; so the earnings yield would be ½ which is equal to 0.5 or 50%.
So as a stock investor you’d want to invest into a stock with a low earnings multiple. The lower is the earnings multiple the higher is the percentage of the earnings yield. If I was to say the same thing using different words, I’d say stock investors like stocks with high earnings yield percentage.
These steps are some of the basic ones you’ll need to put in practice to find undervalued stocks. Keep in mind that you’ll always have to dig deeper and look for more information when you spot a stock that looks like it’s being traded under its real value.