If a stock is being sold in the stock market at a price, which is lesser than its intrinsic value, then that stock would be called an undervalued stock. The fact that a stock is undervalued could be determined if the expected cash flows of future forecast the value of that stock to be more than its present selling price.
Process of Undervalued Stock
The investors who purchase undervalued stocks need to follow a certain process before they put their money in these stocks. In order to avoid losses the investors must make sure that they know about the future prospects of the particular company.
The company needs to make significant amount of profits in the future so that it can sell undervalued stocks in the stock markets.
The companies that deal in undervalued stocks have the following characteristics:
The record of earning of the particular company is fixed
The lower Price/Earning ratio of these companies is not because of the profits that have been made from capital gains
The particular company does not deal in high-technology that might become useless after a few days
Such companies do not have lower levels of Price/Earning ratio owing to a significant fall in the amount of profits made by them
The particular company is not going through a monetary scandal at present
Facts Related to Undervalued Stocks
Following are some important facts that are related to undervalued stocks:
A good stock, which has a decent price stands more chances to be sold at less than the intrinsic value than an inadequate stock, which is not expensive
A stock that is undervalued has a lower Price/Earning ratio
The value of a good stock normally goes up in time while the worth of a mediocre stock comes down
Books on Undervalued Stocks
Following are some important books that deal with the concept of undervalued stocks:
- “The Warren Buffett Way” written by Robert
- “The Intelligent Investor” written by Benjamin Graham
Last Updated on : 1st July 2013