How To Find Undervalued Stocks

1. I highly recommend narrowing your search for undervalued stocks to the types of businesses you understand. 2. There are two basic steps to finding undervalued stocks: developing a rough list of stocks you want to investigate further because they meet your basic screening criteria, then doing a more in-depth analysis of these stocks by examining the financial data of the selected companies. 3. Low price/earnings ratio 4. Price-to-book (P/B) ratio: 5. The key to buying an undervalued stock that is actually worth more than it is currently trading for is to thoroughly research the company and not just buy a stock because a few of its ratios look good or because its price has recently dropped. 6. Think about the company's future prospects – can the company increase its revenue by raising prices? Increasing sales? Lowering expenses? Selling or closing unprofitable divisions? Growing the company? Who are the company's competitors and how strong are they? 7. Lagging relative price performance.If a company’s share price is lower than those of its industry peers, this may reveal an underperformance situation.  8. Debt to current asset ratio: You should select companies with a total debt to current asset ratio of 1.10 or less.  9. Return on Equity less 15% 10. Consistently high profitability: High and preferably increasing net margins are a great sign which indicate that a company is either becoming more efficient, or is able to increase its prices. 11. Return on equity (ROE): A company's annualized net income as a percentage of shareholders' equity. 12. Another strategy that value investors favor is to buy companies whose products or services have been in demand for a long time and are likely to continue to be in demand. 13. High dividend yield.Bet you didn’t think to look at the dividend yield, did you? But actually, if a company’s dividend payment rate exceeds that of their competitors, this may indicate that the share price has dipped to “undervalued” status (in relation to its dividend payment). 14. Low market-to-book ratio.A company that has a low market value (total market capitalization) as a ratio to book value (total shareholder equity) may present an undervaluation situation.  15. Free cash flow. Many investors put less emphasis on reported profit and more on free cash flow. 16. A sustainable competitive advantageHere the analysis goes beyond numbers and financial ratios. Highly profitable businesses attract competitors, and increased competition generally leads to lower profits, except when a company possesses a sustainable competitive advantage. 17. Price-to-earnings to growth (PEG): Found by dividing a stock's P/E ratio by its projected earnings growth rate over a certain time period -- typically the next five years. 18. Honest, competent, shareholder friendly management 19. Estimate intrinsic values 20. The final rule for finding undervalued stocks is to be patient. Sometimes the overall market gets expensive and none of the companies you follow will seem to be trading for attractive values, and that's OK.