Evolution: The evolution of human civilization from the days of hunting on the plains of Africa to the ability to explore space today are a testament to our desire to grow through the upheavals of life. While civilization mellows down most of us, the innate instinct of hunting remains and we channelize the same into directions in order to satisfy that instinct.
Another thing that humans love are bargains. We are willing to travel that extra few kilometers to the store that offers a better discount than the one that is just a stone's throw away. Companies often do that in their first quarter to attract people.
This desire for value compounded by our instinct to hunt manifests in our lives in various ways but none so than in stock market investing especially true when placing trades.
This need for value is utilized to drive business and increase sales by various company's management especially prominent amongst e commerce companies who attract people by offering huge discounts on their products. The same is publicized in media as well. Similarly, there is a style of investing called value investing where the investor hunts for stock of companies that are trading at a huge discount.
Today we aim to dive deep into this style of investing and run you through various ratios and metrics that help one understand valuation of shares and finally provide you with a list of some undervalued stocks that we derived using our proprietary formulae here at fairvalue-calculator.com.
To understand how a stock get undervalued and to find the most undervalued stocks and most undervalued shares, we need to first understand how the market behaves.
Global physical markets on the other hand, rely on traditional settings and tend to be managed by experiences of the past. Irrespective of size of the markets, both million and billion dollar markets including e commerce tend to manage irrationality via increased access, defined process, a play book with forward looking ideas and third party services that come into play.
Let us take the example of a normal fruit market. You go to buy apples today and you purchase some at say a price of $50 for that lot. Now if the season is favorable and there is a surplus of apples in production, the price may drop to $40 or even $30 in price due to the additional supply and if the season is bad, the supply of apples will drop leading to a rise in price say $60 or $70. Never will you find the cost of apples fall to $5 or go up to $500.
If the supply of apples has dropped leading to a rise in prices, demand will subsequently drop as people who cannot afford it will switch to other fruits. The drop in demand will see supply overtaking demand again leading to a drop in prices back to a level where demand will come in again.
Similarly if prices of apples fall due to oversupply, the prices will fall up to the cost of transporting and delivering the apples to the market. If prices fall below the amount it takes to package and transport the apples to the market, the vendors will stop purchasing and selling them leading to a drop in supply and a subsequent increase in demand. That increase in demand will cause an increase in price to normal level as supply and demand will come in equilibrium.
Yet the price of stocks tend to fall so low that they are sometimes available at a discount to earnings. For e.g. due to irrationality, a business may be earning $10 per share but its stock will be available at $5. Similarly the costs of some stocks gets to crazy heights where they begin trading at $1,000 per share while earning only $5 per share.
The first scenario leads us to undervalued stocks that is those that are trading below fair value and which must be invested in and the second scenario leads us to overvalued stock which an investor must avoid.
Over the years, financial metrics have developed which although not fool proof, allow for one to value and identify stocks with suitable valuation for investing as well as those that are expensive and can be avoided. Let us look at some of them below.
The Price to Earnings Ratio (p e) or p/e as it is known is a ratio of the stock price to earnings per share. It is derived by dividing the traded price per share by the earnings per share. At its core, p e measures how much you are willing to pay for the share of the company to earn a unit of profit per share. For e.g. a share of $100 and an earnings per share of $10 means the company has a p e of 10. So in effect you are paying $10 per $1 of company profit.
Obviously in an ideal scenario, you want to be paying as low as possible. However p e is industry sensitive. A stock with pe of 10 may be overvalued and one with pe of 50 may be undervalued. It all depends on its valuation relative to its competitors and within the industry. A good p e ratio will be less than its competitors and industry.
Let us understand pe with an example. Consider the retail store industry in u.s.
We have Costco which was trading at a ratio higher than industry and peers, Walmart which has a ratio on par with the average and Target Corp which has a ratio which is half of industry average and its peers. Consequently the same is also reflected in stock growth and performance.
Investors in Target Corp who found the company's fundamentals to be undervalued and were tracking the same in quarter on quarter were rewarded with massive returns on investment whereas those with investment in costco which takes personal data into consideration for memberships and Walmart which offers great discounts all had to settle for mediocre returns. Our service calculates P E ratio for you.
The Price to sales ratio or PS ratio as it is known is the ratio of share price of the company to revenue per share of the company. Similar to P E, it is an indication of the amount of money per share that you are willing to pay to earn a unit revenue per share. For e.g. a business with a share of $100 and revenue per share of $50 has a P/S of 2.
This means you are willing to pay $2 per $1 of revenue. Like P/E, the ratio in itself has no meaning but when compared with its peers and industry, degree of valuation is determined and one can identify undervalued stocks.
Growth is captured and this allows for loss making companies to be compared and valued for their investment quality but is no guarantee for that company's future profitability. The recent pandemic too has brought this ratio into limelight as the globe suffers while revenues drop and the media hullabaloo sheds light on failing services. Also companies especially suffered in the first quarter of the pandemic.
Let us look at the example of insurance companies since their revenues almost always translate to profits barring extreme scenarios like the pandemic.
One can see that Prudential Financial is incredibly attractive as compared to Chubb which is overvalued and Allianz which is on par with industry average. The same is also reflected in its performance.
Investors with Prudential Financial in their portfolio did really well as compared to those with Chubb and Allianz in their portfolio. Insurance as a service is a business that translates revenue to profits easily and buying one where ratios are approximately half of their average makes sense irrespective of sales being million or billion dollars.
This is an important valuation metric in stock market. Stocks with a higher Return on Equity tend to do better and if they are undervalued with respect to the various valuation metrics, those stocks are all set to deliver explosive returns.
Return on Equity is a measure of profitability of the company with respect to its shareholder equity. It is given by dividing net profit with total shareholder equity. The ratio is especially useful as it highlights the efficiency of the company in using its capital and if the company cannot manage its ROE growth above cost of capital, it will go out of business soon.
Historical data is best considered for ROE. Often quoted in % terms, a company with high ROE is nearly guaranteed to perform. An added advantage is that ROE is sector agnostic so while making investments, one can sell their low ROE stocks in favor of those having high ROE. Also ROE needs to grow year on year else the company's profitability comes into question.
Let us look at some companies across sectors to measure their ROE and performance. The focus is deliberate on a multi sector approach to highlight the impact of this ratio better
These are the top businesses in the u.s world and it is interesting to see that they deal with news, platform facilities, search engines, websites and personal data which is a massive change from 50 years ago when a company would have to be in manufacturing or natural resources to dominate the world. These are worth billion of dollars with top management and widely traded securities with a nearly global reach.
A whole global market is available for these businesses to dabble in which makes ROE even more important in order to filter out those that have no to low growth and which do not do justice to investors money.
Now let us look at their performances over the last year
This highlights an important aspect of these ratios. It is not simply enough to have a good ratio, one also needs to understand underlying business about it.
Netflix which was a market leader once upon a time has to now compete for its position with several new and powerful entrants like Hulu, Disney+. Apple TV, Peacock, Amazon Prime and many more. Its returns have now lined with its ROE.
Apple too has to compete for its phones with several large players like Samsung, Xiaomi and local manufacturers but it continues to remain a large force in its sector aligning its returns with its ROE as well.
Amazon is a market leader in online retailing and continues to dominate the sector. It gained especially high market share during the pandemic when physical retail outlets were shut but online deliveries remain. It has also diversified into other segments like web hosting services where it is again a leader, streaming services and many more.
Finally Google who is not only the dominant player in search engines and mobile operating systems with Android but also a paramount example of a pandemic proof business and its investors have been rewarded.
These ratios above are just a glimpse into the world of measures to find undervalued stocks. There are several more metrics available on fairvalue-calculator.com that will allow you to sift through the data and find gems worth investing in.
Investors will be interested to know about our various calculators on offer both free and paid as well as our premium services that do all of these and much more to make your investments smoother and hassle free.
To those looking to invest for the first time, we have lots of articles and other free material which not only highlights the point of each investment metric but educate on trades and what you could achieve should we become partners.
Looking for your favorite stock? Look no further, our comprehensive database will have it. There are several tools for portfolio management that are nearly complete in their scope and use with a menu section allowing you to peruse through our various offerings.
We also publish articles and reports written by analysts bringing you up to date with some attractive stocks and companies and at the same time tracking news of your investments, all to the point. All your buy and sell decisions can be made here.
You could join us as we take you forward on our platform with a mix of traditional metrics and new age technology service as we guide you on how to invest as well as recommend your trades. We have your best interests at heart and have no intention to sell you anything other than our premium membership.
All your questions of best undervalued stocks to buy now, most undervalued stocks right now, most undervalued stocks today and top undervalued stocks will be answered in our series of articles and on our website. Find thousands of undervalued stocks and the best undervalued stocks. Come try out our premium membership for this quarter and see first hand the difference it makes in your personal investment journey as you look at a new way to invest.
" alt="" />
Disclaimers: fairvalue-calculator.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on fairvalue-calculator.com represent a recommendation to buy or sell a security. The experts may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall fairvalue-calculator.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on fairvalue-calculator.com, or relating to the use of, or inability to use, fairvalue-calculator.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. To follow the instructions on this site is no guarantee for success in the stock market. Stock investments are risky and can cause financial damage.