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There are many competing investment theories about finding the “best” investments based on your time frame, risk tolerance and specific objectives. One approach, dating back at least to Benjamin Graham's 1949 book, The Intelligent Investor, is to identify undervalued stocks that, for one reason or another, are selling at prices far below their underlying values.
In this guide, we will look at why a stock may be undervalued and how to find an undervalued stock so you can make the best investment decisions for your goals.
Successfully finding undervalued stocks takes more skill than throwing a dart at the stock section of the Wall Street Journal. Investors with consistent, long-term success often use a combination of metrics and calculations to pick undervalued companies. Here are some of the ways that people determine whether a stock is undervalued.
1. Find undervalued stocks using a stock screener
2. Spot undervalued stocks with fundamental analysis
3. Identify undervalued stocks through key ratios
4. Use technical analysis to find undervalued stocks
5. Discover undervalued stocks with stock picking services
While you can look at analyst ratings, news reports and other sources, one of the best ways to identify undervalued stocks is using a stock screener. A stock screener is a tool that helps you filter through an extensive list of stocks based on company financial data and other inputs.
There are many high-quality, easy-to-use stock screeners available. Some are free, though you’ll have to pay for the most advanced features. Depending on your investment goals, you may use a pre-defined screener or build your own to help you narrow down to a list of the best stocks for your portfolio.
This large investment research organization provides information on stocks, bonds, mutual funds, ETFs and more. Morningstar offers many stock picks to its community for free.
Fundamental analysis is the use of financial metrics and comparisons to determine the target value of a stock. Professional and advanced investors often use a combination of methodologies. Some of the most important fundamental analysis ratios and tools used in stock valuations include:
One way to identify undervalued stocks is by comparing a company’s financial metrics to those of its industry peers. This method, known as ratio comparison, helps estimate a company’s value based on how it stacks up against competitors.
Some of the most commonly used valuation ratios include:
Technical analysis is a short-term valuation method where you predict future stock prices based on recent and historic patterns. Active stock traders use charts and technical analysis tools to look for stocks they believe are on the way up.
Moby is a cutting-edge platform that enables users to make smarter financial decisions by providing personalized insights and data-driven strategies. The platform focuses on empowering individuals to navigate complex investment markets with ease and confidence. Moby’s technology integrates seamlessly with various financial tools to offer users accurate recommendations, analysis, and financial planning assistance.
In addition to building your own screeners, you can choose to invest in stocks found through a stock picking service. These services rely on teams of professional investment analysts who help you find high-quality investment opportunities.
Stock picking services may be a good fit for your goals, but keep in mind that any other subscriber has access to the exact same list. That can quickly increase the price of a stock recently recommended by a large newsletter or website.
If you invest in single stocks, it's not always easy to pick the next winner in the stock market. The Motley Fool is a well-respected stock picking service with a nearly 30-year track record.
If it were easy to pick undervalued stocks, everyone would be doing it. But investors with patience and the right strategy may find success beating the market by investing in undervalued stocks.
When investing in any asset, including the stock market, it’s essential to weigh out risk and potential returns so you make investment decisions appropriate for your unique investment goals and experience. When you pay close attention to intrinsic value, you may be on track to find the ideal mix of undervalued stocks to set yourself up for financial success.
Fred Whittlesey is a freelance contributor for Moneywise.
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