Recently, we’ve written extensively on company valuations and important financial ratios for value investing. Now we’re going to explore how to find undervalued stocks using these explored methods.
If you missed my blogs on how to value a business and the most important financial ratios for value investing, it’s probably best to give them a read before continuing here. The details and research that’s inside those blogs are vital to understanding how to find undervalued stocks and in following the three simple steps that I’ve laid out below: fundamental analysis, company valuation, and timing.
How to Find Undervalued Stocks in 3 Simple Steps
Finding undervalued stocks to invest in is more than simply running numbers through equations and ratios. Fundamental analysis is only the first step, in fact. That’s why it’s vital to know your investor’s profile before trying to find undervalued stocks for your portfolio.
But, if you already understand your investor’s profile and have a detailed portfolio strategy, then revising the following three steps will help you in building a long-term value-focused portfolio.
1. Fundamental analysis
Start the process by creating a long list of stocks that you’re interested in. If you don’t have a watch list of stocks, you can do this by initially capturing stocks recommended by trustworthy investors, stocks that catch your eye or are recommended by your stock screening software, or simply by scanning through industries and territories that you want to invest in.
To create your long list, you should fundamentally analyse your watch list of stocks using financial ratios like: P/E ratio, price to book ratio, debt equity ratio, PEG ratio, et cetera.
2. Company valuation
Now you’ll want to cut your long list down into a short list of the most undervalued stocks. This can largely come down to an investor’s personal preference.
In this section you’ll probably want to look at various valuation methods, like a company’s physical and intellectual assets, discounted cash flow, profit margins and sustainability, and comparable value against competitors.
3. Timing and patience
Perhaps the hardest part of the entire process for finding undervalued stocks is the timing of when to buy. When you get to this step, you’ll have weaned your short list down to the stocks that you have absolute confidence in (almost).
If you have confidence in your stock decisions, then you’ll know that over the long-term, these stocks’ values will rise. That means that, whenever you purchase them, you stand to make money. But you simply can’t time the market. So, what you’re after is valuable stocks with low risk, and then you’ll want to have enough patience to last out your own long-term strategy. It’s all in the long game.
If you’d like to know more about how to find undervalued stocks and starting a killer value-focused portfolio, then schedule a free STRIDE demo below and get the best out of this platform.