Undervalued Stocks
The undervalued stocks are among the best forms of investment on the market today. Normally, the concept of stock involves large companies selling partial ownership and control to people in exchange for pieces of paper called stocks that come with voting rights. More so, the stock comes with monetary returns at the end of every financial period called dividend.
These shares can also be sold from one investor to another with people preferring to sell them when they have appreciated in value or when they suspect that their value is about to fall. Different companies’ stocks are of different values. Some stocks cost less and therefore have lower dividends and are undesirable. Others cost more and have higher returns. However, there are some which, for a short period of time, will cost less but they are actually valuable. When other investors discover this, these undervalued stocks then shoot up and those who bought them at a lower price can sell them at a higher amount. Explained here are some criteria with which to identify these stocks.
The first thing to do is to look at the size of the company. It is important to consider companies whose capital investment is between $250 million and $1 billion. These companies are neither small nor are they large. Financial history has shown that these companies have the greatest potential for take off more than any other category of firms. However, this is not a foolproof method for finding undervalued stocks. Some of these companies may end up making losses and thus have the value of their stocks actually get lower, but it is a great starting point.
Companies with a low beta ratio preferably less than 1.0 are ideal as compared to those with a higher one. This ratio measures how sensitive a company’s returns are to the market returns. Theoretically, a stock which has its returns varying less than those of the market has a less than 1.0 beta value. This makes it less risky and volatile to market changes.
The other factor that is becoming increasingly important in rightly identifying undervalued stocks is whether the company is global or not. In recent year, America’s economic might has been undermined by many emerging economies such as China. This means that in the event of an economic shock like the one experienced in 2009, there is a very high chance that if the company’s main market is American, it is likely to suffer. However, if the market is international, then the moment the American market suffers, it can always depend on other markets around the world to supplement that which has been lost in America.
The other way of finding undervalued stocks is to look at a company’s financial performance history. Pick a company that has shown consistent growth over the past five years. A continuous growth of approximately 10 per cent per year is a good indicator. This percentage should cover the following parameters – ROIC (Returns on capital invested), EPS (Earnings per share), free cash flow, sales and BVPS (book value per share).
