In this article we show you how to find cheap and undervalued stocks easily and quickly. With the following tools and metrics everyone can find good undervalued stocks. We also give you instructions on how to find undervalued stocks yourself.
In addition, we will show you abnormalities that also promise more returns on undervalued stocks. In this article:
- Instructions: Find undervalued stocks
- What is fundamental stock analysis
- This is how you recognize undervalued stocks
- Characteristics of good stocks
- Tools and stock screeners to find undervalued stocks
How to find undervalued stocks!
Actually, we all want the same: Find a stock that is in itself worth more than it currently costs and then ignites a price firework. How nice would the feeling of predicting this firework be? Not only the financial gain, but also the "right" gives us satisfaction.
At least I feel that way!
Unfortunately, I cannot show you the magic glass ball, which is always right. But there are certain properties that give us clues as to whether a stock is currently undervalued, i.e. cheap or overvalued expensive. In addition, there are long studies on different key figures and how they affect future share prices.
Fundamental stock analysis
In order to identify undervalued stocks, you have to take a look at the books and fundamental data of the stock companies. Each public company publishes quarterly reports and once at the end of the year, reports that convey the course of business. These reports include the balance sheet, the income statement and a management report. Most of the annual reports can be found on the homepage of the stock corporation under the tab "Investors Relations".
"But don't worry! You don't have to complete a full business degree to identify undervalued stocks !"
The information from the annual reports is processed in the "fundamental stock analysis" to draw conclusions from whether a stock is undervalued or too expensive. The key figures and data of the annual reports, which are used in the fundamental stock analysis, can be found clearly on financial portals on the Internet.
Below I show you the best website for fundamental key figures for the analysis of undervalued stocks:
On this financial portal, you can either search for the name of the share or directly for the share by its number (WKN / ISIN number). Then you should look for a tab "Fundamental Analysis", "Fundamental Key Figures" or "GUV". On this subpage of the stocks you can find all the data we need to find undervalued stocks. The most important key figures and ratios have already been calculated on Yahoo finance.
How to identify undervalued stocks
more return THROUGH THE INTERPRETATION OF FUNDAMENTAL KEY FIGURES:
Fundamental data and key figures can be used to estimate whether a stock is undervalued or expensive. In the following you will find the most important key figures and ratio numbers. Each of these key figures has advantages and disadvantages and a joint assessment of the respective key figures makes sense.
In order to show you which key figures are really meaningful in order to find undervalued stocks and achieve more returns, we have examined each key figure and summarized the resulting excess returns for you. List of key fundamentals for stock valuation:
Price Earnings Ratio - P/E ratio
P/E ratio: Ratio between the current stock price and the profit of the company.
Calculation P/E ratio: Share price / (Profit / Number of shares issued)
Target value / average value P/E ratio: The average P/E ratio for the largest shares from Germany and the USA is between 15 and 20 on average over 30 years. The lower the P/E ratio of a share, the more likely the share is undervalued.
Scientific evidence: Shiller shows that the lower the P/E ratio, the higher the expected return on shares. Since 1890, stocks with lower P/E ratios have had higher returns. (Robert Shiller, John Campbell 1988)
Note: The profit of a stock corporation can fluctuate greatly and can be distorted by accounting tricks. Therefore, one should use averages and longer observation periods.
Price Cashflow Ratio - P/CF Ratio
P/CF: Ratio of the market price of a share to its cash flow.
Calculation P/CF: Share price / (Cash flow / Number of shares issued)
Target value / average value: The average P/CF, like the P / E ratio, is between 15 and 20. The lower the P/CF of the share, the better.
Note: Cash flow is the cash that the company actually has from profit to work and invest. Compared to looking at earnings, the cash flow is more meaningful.
Price to book Ratio - P/B Ratio
P/B Ratio: Ratio of the stock exchange price of a share to its book value.
Calculation P/B Ratio: (Share price * Number of shares issued) / Equity
Target value / average value P/B Ratio: A P/B of less than 1-3 indicates an undervalued company.
Scientific evidence: Shares with a low price to book ratio beat shares with a high price to book ratio by an average of 7% per
year and the overall market by 2.7% annually. (Further: Fama and French, Cross Section of expected Returns, 1992 "The P/B ratio is the best key figure to explain future stock
Tip: You receive these and other key figures for countless shares with a premium membership in the Fair Value Calculator. With just a few clicks, you can find undervalued shares on the respective stock subpages and create your own sample portfolio in accordance with the fair value strategy.
Characteristics of undervalued stocks
In addition to the P/E, P/CF and P/B Ratio, there are other scientifically documented characteristics in undervalued shares. The following "abnormalities" in stocks promise long-term stock investors so-called "return premiums". Here is a list of the properties of stocks that promise more returns over decades:
Small Cap Premium
The small cap premium is a phenomenon that stocks from smaller stock corporations tend to deliver higher average returns than stocks from companies with a large market capitalization.
It can be assumed that small caps have an annual return that is around 2% higher than large or high caps. (Fama French et al.) Even if small companies have not really generated more returns in the past 10 years, it cannot be ruled out that this irregularity will be made up for in the future.
The reason for this abnormality is that smaller companies do not operate all over the world and smaller companies fluctuate more in the share price.
The small cap premium can therefore be understood as a certain "compensation for pain and suffering" for larger fluctuations.
Buy past winners - the momentum strategy
Shares that have gone well in the past will continue to do well in the future. (Returns to Buying Winners and Selling Losers, Tobias Thejll and References in this Thesis.) That sounds a bit banal at first and is actually exactly what is being warned, according to the motto: "Just because the stock has risen does not mean that that this continues to rise! "
But exactly that does not seem to be true, because studies show that the historical price has an effect on the future price.
It is therefore worth taking a look at the historical price trend to see whether a share is developing positively. It should be noted here that shares that have risen particularly sharply may also fall sharply during recession as a result.
By combining the fundamental key figures, an approximate true value of a company can be determined. You can use the Fair Value Calculator to determine the approximate true value of a share.
The value premium is based on the assumption that the market "overlooks" certain stocks. Due to distortions and exaggerations there are constant price fluctuations on the stock exchange, which can be exploited by the intelligent investor through the value premium.
In order to benefit from the value premium, you have to find stocks that are actually worth more than they currently cost.
Statistical evaluations confirm that stocks are more likely to bring more returns if the debt is low and the company is able to reduce its debts steadily.
Here you should keep an eye on the debt and whether the debt shrinks over time. Debt data is available on relevant financial portals or in the Fair Value Calculator premium database.
Tools and stock screener for undervalued stocks
To find undervalued stocks you need tools like the Fair Value Calculator, Finviz or the stock screener from Investing.com. With these tools, stocks can be automatically listed under certain default settings.
So you can quickly find undervalued stocks. In the following list we have listed the best stock screeners for you so that you can quickly and easily find undervalued stocks with the appropriate tool:
Fair Value Calculator
Easily list undervalued stocks: The Fair Value Calculator is a fundamental analysis tool that, by combining the most important fundamental indicators, calculates an approximate true value of the stock.
All the user then has to do is look for shares whose intrinsic true value (fair value) is higher than the current market price. A long holding period shows that such fair value stocks bring more returns than the market or overvalued stocks.
The Fair Value Calculator is a simple but effective way to find undervalued stocks. Of course, the fair value calculator does not replace a full professional analysis of a stock. But the chances are high that you will come across an undervalued bargain.
Once you have found a share, you can see all the key figures that we have presented to you on the underside of that share. In addition, the targets can be found directly next to the key figures and a comparison of industries is also possible. After selecting the relevant industries, the key figures turn green or red, depending on whether the company is doing better or worse than the industry average.
Stock Screener Finviz
Finviz is a powerful equity screener, with which you can clearly set the appropriate filters for the fundamental key figures. We have already set the criteria from this article for you. We have set the P/E ratio below 15, the P/CF below 15, the P/B below 3 and a positive share price development.
An exciting tool with many options! Here you can play around and also quickly get stock ideas where an investment could be worthwhile.
Stock screener Investing.com
A little easier to use, but with fewer setting options: The Stock Screener from Investing.com. Here you can set the values in different languages and also get an overview of possible undervalued stocks by entering the fundamental key figures.
It is also worth taking a look here, because I find it really fun to test the different settings!
Finding an undervalued stock is not always easy, but if the P/E, P/CF, P/B ratios are low and the stock is performing well, the chances of a bargain are good. In addition, with the help of proper fundamental stock analysis, you can secure a certain advantage over the other market participants.
There are numerous tools available to help investors find undervalued stocks. However, one thing has to be said in conclusion. Not always when a stock is heavily undervalued, it is actually a bargain. Because there are often reasons why stocks are lower than they should be. Therefore, you should always look at the latest quarterly reports, news and the debt of the company to avoid unwanted risks.
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