How to Find Undervalued Stocks: 7 Powerful Methods 2022 Investors Handbook

Although the financial services sector bounced back some from its year-to-date lows after the regional banking crisis, the sector’s return is barely in positive territory for the year through June. More than half of the financial services stocks we cover are trading below their fair values, notes Morningstar sector director Michael Wong, with the most opportunities among the credit services firms and banks. Basic-materials stocks have underperformed the broader market this year and are coming into the third quarter about 10% undervalued. Morningstar strategist Seth Goldstein reports that 70% of the stocks that Morningstar covers in the sector are trading with Morningstar Ratings of 4 or 5 stars. While building-materials stocks remain overvalued, many stocks in the agriculture and forest products industries are underpriced, as are three fourths of the chemicals stocks under our coverage.

Using an undervalued stock screener gives you a curated selection of tickers you can dive deeper into, so you can determine whether their share price will eventually reflect their perceived value. A low P/E ratio signifies a low share price compared to the company’s annual earnings, which might mean its stock is undervalued. They could be those of a company in a new or emerging industry that isn’t mainstream yet, so consider that in your search, too.

A great tool that helps you to identify the best undervalued stocks in minutes comes up with a list of companies that match your criteria. When you select your stock screener of choice, you can add filters such as market cap, stock price, sector, P/E ratio, and more. Like panning for gold, this process allows you to sift through numerous stocks until you find ones that appear to be undervalued. If you’re looking for something that can help do some of the work for you, you may want to use a stock screener.

A stock screener for undervalued stocks is a tool that helps you look for undervalued stocks. It can take the thousands of tickers on the stock market and filter them down to a manageable handful that you can research further to determine whether they’re worth trading. Another thing you’ll want to look at when searching for undervalued stocks is the company’s market capitalization or market cap.

Undervalued Stocks in the Consumer Defensive Sector

Finviz Elite is a lower-priced analysis tool with real-time and extended trading hours stock quotes, advanced charting, correlations analysis, backtest functionalities, alerts and email notifications. You can also use a more advanced screener with more filters and export functionalities for $39.50 per month or $299.50 per year. This can be a stock that has a strong cash flow and minimal debt despite the sector-wide downturn. If you’re able to find one of these stocks, you can reap the benefits of growth once the sector rebounds. On the other hand, if a company continues to perform well and also sees a rising share price, it is less likely that the stock is undervalued. Read along to learn more about the different ways you can find undervalued stocks and what makes a stock undervalued.

Before the lock down last year, my focus for stock investing was low-cost index funds. I knew the market wasn’t always efficient, but I wasn’t sure how to take advantage of it when it wasn’t. The debt-equity ratio compares a company’s total debt with the total shareholder’s equity and indicates how much debt a company has for every $1 of equity.

The Data

Before choosing to invest in a stock, think about why you’re choosing it, because your « why » will carry you through market volatility. Also consider applying Warren Buffet’s advice of only investing in what you understand. For example, if tech stocks are on the decline, you could look for companies that have declined along with the rest of the sector, but still show potential for strong growth over the long term. We believe everyone should be able to make financial decisions with confidence.

For example, the company could have core issues like unexpected changes in the company structure or maybe issues with financial management. Return on equity (ROE) is calculated as net income divided by shareholder’s equity. You can compare the ROE of a given stock to the ROE of other stocks within the same sector to identify valuable investment opportunities. A low P/E ratio can indicate that the analyzed stock is undervalued since the Price-Earnings ratio tells you how much money you have to invest for every $1 of the company earnings. The lower the ratio, the more earnings you get per dollar invested. Yet, the ratio is only as good as the earnings projections of a company.

You could also consider looking at specific sectors of the market while hunting for undervalued stocks. The P/B ratio takes the price per share and divides it by the book value per share, whereas an undervalued stock tends to have a P/B ratio below 1. I consider The Motley Fool Stock Advisor the unbeaten leader in this segment with a great long-term performance since inception, and over 175 of their stock undervalued growth stock screener picks up by more than 100%. There are always two paths to go when investing by either doing all the analysis by yourself or relying on information provided by others. Investment newsletters are a great choice if the latter is your favorite approach. The best investment newsletters archive average returns of more than 25% annually compared to a 10% average in indices like the S&P500 or Dow Jones Index.

More from Building Arks with Jason Clendenen and DataDrivenInvestor

If you’re not quite sure about a stock, consider talking to a financial advisor. Sometimes, stocks are undervalued because they’re pulled down by their sector or the overall market, says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan. However, the companies of such undervalued stocks usually have strong balance sheets, good net free cash flow and a strong future outlook. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

• Generally speaking, a company with a small market cap may be more volatile and can be seen as a growth stock, whereas companies with large market caps are often more stable.
• It’s also great for screening for undervalued stocks — it has indicators like EPS and P/E ratio built in.
• Because of this, always look at similar companies’ ratios to help determine if the stock you’re looking at is an overvalued or undervalued stock.
• Yet, the ratio is only as good as the earnings projections of a company.
• You can compare the ROE of a given stock to the ROE of other stocks within the same sector to identify valuable investment opportunities.

You can evaluate undervalued stocks by looking at certain indicators, like their price-to-earnings ratio (P/E ratio) and earnings per share (EPS). So investors who bought in when the price was around $4 a share reaped the benefits of undervalued stocks that end up doing well in the long-term. We currently have 5 trillion market cap companies, but 109 companies above 100 billion. If you sort those stocks in your stock screener by market cap and use free stock charts to visualize the price development using a weekly or monthly time frame, you quickly see how well they did. In addition, it is possible to connect multiple brokerage accounts, which makes Stock Rover one of the best portfolio analysis tools for investors and traders.

TrendSpider

By extension, a value investor tries to buy undervalued stocks and collect profits as their share prices appreciate back to fair value. When using the dividend yield to find undervalued companies, you’ll want to look for consistency. If a company has a history of paying a high amount of dividends—even if the share price is low—that’s often a sign that the company’s financials are strong. Morningstar Investor members have access to lists of 5-star stocks and 4-star stocks and can use the Morningstar Investor screener to find undervalued stocks based on their own criteria.

The companies whose stock is undervalued may have strong cash flow and balance sheets. So even if the prices dip, investors buy because they’re getting what they believe to be valuable stock for less money before prices shoot up. In addition to looking at the PE ratio, a company’s market capitalization — or market cap — can also give you insight into the true value of a stock.

You could also play it safe by buying only a few shares and watching how your investment progresses over time. An important aspect here is that there is no exact figure in all ratios that directly indicates an undervalued stock by looking just at one stock. While previous performance is never a guarantee for future performance, a chart can be helpful in understanding where the stock price stands relative to the all-time high, all-time low or IPO price. Before we get into the details on how to find undervalued stocks in terms of the specific criteria to look for, I’ll introduce you to the best tools that help you find those undervalued stocks. So I recently discovered the Yahoo Undervalued Growth Stocks screener which is proving really valuable in adding interesting undervalued growth stocks from the US market, posting here for anyone who doesn’t know about it. I couldn’t find anything outside of this in the UK so made my own spreadsheet (albeit static) for the FTSE 100.

• Undervalued stocks can become more attractive to some investors in times of stock market volatility, says Milan.
• The pricing ranges from $7.99 per month for the Essential version to $27.99 per month for the Premium Plus version.
• The majority of the names in the sector are trading in either 4- or 5-star range.

All you need to do is set specific trading requirements, and the bot will do the rest for you. “One example could be Qualcomm — which has been pulled down with the overall tech sector — but even more specifically, within semiconductors, it’s often been overlooked on its own. But it’s trading at a greater discount in comparison to its peers,” Milan says.

How to Evaluate Undervalued Stocks

Using an undervalued stock screener helps you find the stocks that match your preferences and trading strategies. Understand — finding a good undervalued stock is more about researching than screening, but you can’t research every single stock. When the market catapulted from its lows in October 2022 by nearly 30% to its current highs in just under one year, something interesting happened.

The free 14-day trial is surely the best way to get started testing Seeking Alpha Premium inside out, considering if it is worth it for you to continue subscribing after the free trial for $239 per year. From there, you can dwindle your list by further researching the stock, comparing it to its competitors, or looking at its financial statements for more context. To avoid this, be sure to always look into multiple factors before considering a stock to be undervalued.

Then, all you’re left with are the stocks that match your criteria. Did you know that market corrections can actually present great opportunities to buy high-quality stocks at discounted prices? By taking advantage of these times of volatility, you can position your portfolio for long-term growth. Below is a table of the 9 most undervalued stocks in the S&P 500 index, ordered from lowest to highest trailing PE ratio. Undervalued stocks are stocks that trade below their assumed value.