Some investors begin their market investment research by studying undervalued stocks. This investment strategy can produce superior returns in the stock market, as studies show that undervalued stocks tend do better than ones that are overvalued. This method of investing is also known as value investing.
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Free Stock Screeners
Many recognised stock screening services can be used to find a list of undervalued stocks. Some of these services cost thousands of dollars per year, so instead use free stock screeners. Stock screeners can be found at Yahoo Finance, The Motley Fool, MSN Money and Finviz.
Here is a walkthrough of the procedure to use Finviz.com. Other sites should be similar. A direct link to the pertinent area of Finviz.com is provided in Resources.Or, you can navigate to "Screener" in the middle of the Finviz.com home page. Click on "valuation." Click on "market cap" and change it to + Small (over £195 million). Stocks with a market capitalisation under £195 million will be removed from the results.
You will see five columns labelled P/B, P/S, P/E, P/C and PEG. Click on any of the five columns, and the screener will rank the stocks in order beginning with the lowest. Click on the symbol at the beginning of each row to get more information on the stock.
Low Price to Book Value
The book value of a stock is calculated as the total assets minus the total liabilities. This book value is then compared to the market value of the stock.
Low Price to Cash Flow
This ratio measures the cash flow per share relative to the price per share. Since earnings are subject to accounting choices, some investors use cash flow as the denominator because it is less subject to manipulation.
Low Price to Earnings
The price to earnings ratio is the most popular method of determining a list of undervalued stocks. The ratio is calculated as the price of the stock divided by the earnings per share.
Low Price to Sales
This ratio measures the sales per share relative to the price per share. Like cash flow, sales are less susceptible to manipulation, so some investors use this measure.
Low Price to Earnings Growth
The price to earnings growth measures the long-term growth rate of the stock's earnings, in relation to the price to earnings ratio. This measure puts the valuation of a stock into context with its growth rate.
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