As a stock market trader, you have probably heard of undervalued stocks many times, but maybe you have never tried them.
By definition, an undervalued stock is an asset whose price is lower than its actual value.
The stocks become undervalued due to multiple reasons, with the main one being lack of recognition. The price might also become low if the company has been involved in a scandal or is new in the market and is trying to attract new investors. However, the reduced price does not always translate to quality. There are a few aspects that you must consider when choosing a promising and undervalued stock.
Here are helpful tips for the choosing process:
Consider the Price per Earning Ratio
The first tip would be to check the price per earnings ratio. This ratio is all about comparing the price of the stock to its current value. It determines how long it will take you to get your first profit. If the price per ratio is high, then the buying price is high, and the profit would be high. The low P/E signifies a better buying opportunity, but it’s always advisable to determine the cause of the low buying price.
Consider the Trading Volume
What is the current trading volume of stocks in that particular firm? Are other people interested in buying those stocks, or it’s only you? Check the current number of investors in the firm, and compare it to the number there a few years ago. If the trading volume has been decreasing over time, then that would be a red sign. You should only buy your dollar stocks from a firm with a high trading volume. Even when you decide to quit, you will be sure that you will get someone to leave your stocks.
Consider the Current Ratio of the Firm
The current ratio measures the ability of the firm to repay its debts. You can get it by dividing the firm’s assets to its liabilities. If the current ratio is positive, then the assets can cover the liabilities well, which means your investments won’t disappear into thin air with ease. But if the current ratio is negative, the firm’s debts are too high, and you will be risking investing in those stocks. Besides, the lower current ratio means that the assets will continue to be undervalued for an extended period, and it might take forever for you to start gaining profits.
Consider the Dividend Yields
In simple terms, the dividend yield is the amount that the firm offers to its investors at the end of every year. You can get the dividend yield and divide it into the stocks’ current market price to know the best amount. For comparison, you may check the dividends yield performance for the same company for the past years. If the dividends have not been increasing or they remain the same, then that would be a red sign that those stocks may continue to be undervalued for a more extended period.
Consider the Cash Flow
You may still use the cash flows to find promising undervalued stocks. The cash flow is determined by the amount of money the company remains with after settling its expenses. You may be amused to find the stock is only undervalued because the firm reported lower earnings in those years. However, you may still need to compare the cash flow of different low priced stocks to get the most promising one.
Compare Competitor Pricing
Don’t focus too much on the same firm lest you forget to check what other stock firms are offering. An apple to apple comparison involves checking the price of an undervalued stock against an overvalued stock. For the best comparison, you may need to check the moving average of the selected firms’ performance for the past ten or so years. Maybe, some firms are overpricing their stocks, making the lower-priced ones lose their value.
Check the Reputation and Quality of the Exchange
The last tip for finding a promising undervalued stock is to check the website where it’s listed. Don’t trust all the stock exchange sites you see on the internet. It would help if you did background research on those sites for your good to ensure that you are choosing the best. The reputable sites for penny stocks include NSE, NASDAQ, and OTCQX.
Follow the tips above to choose an outstanding undervalued stock. Do the right performance metrics, and consider the reputation too. Do not hesitate to seek expert help regarding the best penny stocks that you should buy. An expert could be a person who has traded those stocks or helps new investors like you.