Did you know that Amazon was once an undervalued stock, trading at just $1.50 per share in 1997? Today, it's worth over $3,000 per share, at a profit of around 2000%! Investing in undervalued stocks can transform your portfolio by capitalizing on market inefficiencies. You can secure substantial returns as the market corrects by identifying stocks trading below their true value.
But how to identify these undervalued stocks?
This blog by NIWS will help you find the best strategies to determine an undervalued stock. At NIWS, India's leading stock market institute, we offer comprehensive courses to help you master these strategies. Check out our stock market course in Indore to get started.
Read on to learn what undervalued stocks are, how to spot undervalued stocks, and how to boost your investment success.
Undervalued stocks are shares of companies currently trading below their intrinsic value, which is the actual worth of a stock based on the company's fundamentals, like assets, earnings, and dividends. For example, if a stock’s intrinsic value is ₹500 but trading at ₹300, it's considered undervalued. These stocks are typically listed on major stock exchanges like NSE and BSE in India.
Some of the undervalued stocks in India for 2024 include:
Aavas Financiers Ltd: A housing finance company providing loans to low and middle-income segments, showing significant potential despite its current lower market price.
Caplin Point Laboratories Ltd: A pharmaceutical company with strong fundamentals and growth prospects, trading below its intrinsic value.
Oberoi Realty Ltd: Engaged in real estate development and hospitality, this stock offers potential growth as the market corrects its undervaluation.
IOL Chemicals and Pharmaceuticals Ltd: Known for producing Ibuprofen, it has shown impressive financial growth and remains undervalued.
Mahanagar Gas Ltd: A leading natural gas distribution company with strong financials, yet trading at a lower price.
(NOTE - Please note that this is based on individual preference, and no guarantee for their price rise is given on our end.)
Investing in undervalued stocks can be highly profitable as their prices will likely rise over time, allowing investors to capitalise on these market opportunities. Recognising undervalued stocks involves analysing financial metrics and market conditions to spot these hidden gems.
The P/E ratio measures how much investors are willing to pay for each rupee of a company's earnings. It’s calculated by dividing the current share price by the earnings per share (EPS).
Share Price: This is the current price at which a company's stock is trading on the market.
Earnings Per Share (EPS): This is the portion of a company’s profit allocated to each outstanding share of common stock. It’s calculated by dividing the company’s net income by the number of outstanding shares.
P/E Ratio=Earnings per Share (EPS) / Share Price
A lower P/E ratio compared to similar companies or the overall market average may suggest that a stock is undervalued. This indicates that investors are paying less for each unit of earnings, which might present a good buying opportunity.
The D/E ratio compares a company’s total debt to its shareholder equity. It shows how much debt the company is using to finance its assets.
Debt: This includes all the company's short-term and long-term liabilities.
Equity: This is the value of the shareholder's interest in the company, calculated as total assets minus total liabilities.
D/E Ratio=Total Debt / Shareholder Equity
A lower D/E ratio indicates less debt and potentially less risk. Stocks with a low D/E ratio might be undervalued if the market hasn’t recognised their financial stability.
ROE measures how well a company uses investments to generate earnings growth. It’s calculated by dividing net income by shareholder equity.
Net Income: This is the company’s total profit after taxes.
Shareholder Equity: This is the company's total value owned by shareholders.
ROE=Net Income / Shareholder Equity
A high ROE indicates efficient use of equity. If a company has a high ROE but a lower stock price than its peers, it might be undervalued.
Earnings yield is the inverse of the P/E ratio and represents the earnings per share as a percentage of the stock price.
Earnings Yield = Earnings per Share (EPS) / Share Price
A higher earnings yield suggests that a stock may be undervalued. It indicates that the company generates significant earnings relative to its share price.
Dividend yield shows how much a company pays out in dividends each year relative to its stock price.
Annual Dividends per Share: This is the total dividends paid out per share over a year.
Price per Share: This is the current trading price of the stock.
Dividend Yield=Annual Dividends per / SharePrice per Share
A high dividend yield can indicate that a stock is undervalued, as it suggests that investors are getting a significant return on their investment through dividends.
The current ratio measures a company’s ability to pay short-term liabilities with its short-term assets.
Current Assets: These are the company’s assets that are expected to be converted into cash within a year.
Current Liabilities: These are the company’s liabilities that are due within a year.
Current Ratio = Current Assets / Current Liabilities
A higher current ratio indicates good liquidity and financial health. Stocks with a high current ratio may be undervalued if their financial stability is not reflected in the share price.
The PEG ratio considers a stock’s P/E ratio and its expected earnings growth rate.
P/E Ratio: This is the price-to-earnings ratio.
Annual EPS Growth: This is the expected annual earnings growth rate per share.
PEG Ratio = P/E Ratio / Annual EPS Growth
A lower PEG ratio suggests a stock is undervalued relative to its growth potential. A PEG ratio below 1 is often considered a good indicator of undervaluation.
The P/B ratio compares a company’s market value to its book value.
Market Value per Share: This is the stock's current trading price.
Book Value per Share is the company’s total assets minus its total liabilities divided by the number of outstanding shares.
P/B Ratio=Market Value per Share / Book Value per Share
A lower P/B ratio indicates a stock may be undervalued relative to its net assets. A P/B ratio below 1 suggests that the stock trades for less than the company’s book value.
Undervalued stocks often have significant growth potential. When the market realises its true value, prices can increase substantially.
These stocks usually carry less risk as they are already trading at a discount, providing a safety cushion against market fluctuations.
Many undervalued stocks pay dividends, offering a steady income stream even if the stock price is low.
Companies with strong fundamentals and growth prospects are often undervalued, presenting opportunities for long-term capital appreciation.
Prices of undervalued stocks tend to rise when temporary issues are resolved, or market inefficiencies are corrected.
Including undervalued stocks in your portfolio can enhance diversification, reduce overall risk, and stabilize during market downturns.
Buying undervalued stocks often involves going against market trends and securing stocks at reduced prices for better entry points.
Holding undervalued stocks long-term allows for capital appreciation and dividend reinvestment, leading to exponential growth.
Investing in undervalued stocks is a powerful strategy for achieving high returns with lower risk. By using metrics like the P/E ratio, D/E ratio, ROE, earnings yield, dividend yield, current ratio, PEG ratio, and P/B ratio, investors can identify stocks trading below their intrinsic value. These stocks offer significant growth potential and stable income through dividends.
At NIWS, India's leading stock market institute, we provide the expertise and resources to help you master these strategies and make informed investment decisions. Start your journey with NIWS and unlock the potential of undervalued stocks to enhance your portfolio.
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