How would you know if a stock is undervalued?

Posted by Fitz Villafuerte under Investing on December 27, 2011




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2 Responses to “How would you know if a stock is undervalued?”

  1. Fitz says:

    The simplest way is to compute the PB ratio or market price divided by book value. If the ratio is below 1, then the stock is undervalued.

    But the challenge is always finding what the book value of a company is. That’s why it’s also good to use the PE ratio of the company.

    Lastly, according to Wikipedia, these are the ten signs that a stock is undervalued.
    1. The company’s earning history is stable.
    2. The company does not specialize in high-technology that can become obsolete overnight.
    3. The company is not in the middle of some financial scandal.
    4. The company’s low PE ratio is not due to profits realized from capital gains.
    5. The company’s low PE ratio is not due to a major decline in profitability.
    6. The company’s PE ratio is below its average PE ratio for the last 10 years.
    7. The company is selling at a price below its tangible asset value.
    8. The company’s trailing 3-years earnings has risen over the past 10 years.
    9. The company’s credit rating is AAA, AA, or A, or even better, there is no rating because there is no debt at all.
    10. The company did not have a loss during the last recession.

    In general, stock brokers should have data regarding the PE ratio of companies which you can request.

  2. ace says:

    thanks a lot

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