Select Page

How To Find Undervalued Stocks

Curated by the Ticker Table Team
How To Find Undervalued Stocks

The market is always right – or is it? Stocks represent the future valuation of the underlying company. Valuations are dynamic and affected by various factors not related to the actual company performance. Many times, the markets will overlook stocks as they remain undervalued for long periods of time. Finding these undervalued stocks takes some legwork but the payoff can be exceptional. Here’s how to find them.

What is an Undervalued Stock?

An undervalued stock is perceived to be trading at a discount to its “true” value. In many cases, an undervalued stock is performing well below it’s peers, industry, sector and benchmark indexes. It can be perceived as “cheap”, for a reason. Stocks tend to be undervalued due to material changes or deficits in the underlying business operations such as high levels or debt, declining market share, negative growth, regulatory issues and lowered expectations. Undervalued stocks tend to be perceived by the market as having problems, sometimes unfairly.  

The Subjective Nature of Value

Beauty is in the eye of the beholder. Two investors can see the same stock and have their own idea of whether it is overvalued or undervalued. The argument for either side can be that the market has yet to recognize the real value. Value is dynamic, never static. The market will determine the true value of a stock, but that value will not stay static. Stocks can remain undervalued or overvalued for years.

Quantifiable Metrics for Gauging Value 

To apply a conventional method of valuation, you can use common valuation metrics for any stock and compare them to peers or against industry and sector averages. You can use any combination of the financial metrics for your analysis. Here’s some of the common criteria you can use to as premises to determine a stock is undervalued:

Low P/E Ratio

The price to earnings (P/E) ratio is one of the most commonly used quantifiable metrics to determine if a stock is overvalued or undervalued. The P/E is determined by dividing the stock price by its earnings. Keep in mind, the company needs to have net earnings (profits) in order to even have a P/E ratio. If a company is projecting profits, then a forward P/E can be attained based on future estimates. A low P/E ratio is one factor used to gauge an undervalued stock. Low or high P/E can be measured by compared to peer stocks or an industry average. For example, if XYZ has a P/E of 8 versus its top competitor with a P/E of 20, then it is comparatively undervalued. It’s prudent to compare to a number of competitors and even industry averages for the best comparisons. If the industry average P/E is 22, then XYZ is undervalued by P/E. 

Low Price-to-Book Ratio

The price-to-book (P/B) ratio is calculated by dividing the price of the stock by its book value. This metric can be used when then company doesn’t have profits. The P/B ratio can then be compared to peer/competitor and industry averages to determine if it is low and undervalued. 

High Dividend Yield

The dividend yield is calculated by the annual dividend amount divided by the stock price. Dividends are usually paid out (distributed) on a quarterly basis at the ex-dividend date for shareholders of record on a specified date. While a high dividend may seem like a bargain, keep in mind that the higher a dividend means the lower the underlying stock price. If the company is having cash flow problems, the risk of dividends being cut or halted rises. High dividend yields of double-digits not only tend to indicate potential undervalued conditions but also high risk stemming from major underlying problems.

Current Ratio

This metric is used to determine the short-term operating liquidity of the underlying company, also referred to as working capital ratio. It’s calculated by dividing the current assets to its current liabilities. A good current ratio ranges from 1.2 to 2 indicating low debt and high cash flow but should be compared to the industry averages. Keep in mind, this ratio pertains to the company’s financial liquidity not the liquidity of its shares. 

Debt-to-Equity Ratio

This financial metric is calculated by dividing the underlying company’s total liabilities by its shareholder equity. Generally, a good debt-to-equity (D/E) ratio should remain under 2, but certain industries generally have higher average D/E ratios. 

How to Find Undervalued Stocks 

There are many ways to find undervalued stocks based on the financial metrics. Below are three steps to take.

Research To Find Undervalued Stocks

Step 1: Build a Screen/Scan

  1. If your trading broker doesn’t have a scanner/screen, you can utilize many free scanners or take free trials and let the algorithms handle the legwork. Free tools like provide both fundamental and technical scanners that can be configurable to your needs.
  2. For the fundamental inputs, select a combination of the aforementioned financial metrics. (IE: P/E less than 10, P/B less than 3 and Current Ratio less than 2
  3. To tighten the filters, you can add some technical metrics as well (IE: Daily MACD under 30, Stock price less than 10% near 52-week lows

Step 2: Create a Broad List of Candidates 

As you compile stocks that meet your criteria, make sure to start with a broad list and methodically trim the list down to a manageable number (EG: From 20 to 5)

Step 3: Research Further 

As you thin out your list to the best qualified candidates in terms of both fundamental undervaluation and technical oversold levels, prepare to continue researching the individual stocks. Compare them to several peer/competitor stocks both financially and technically (IE: Lower P/E than competitors, MACD under 30/Stochastic under 20-band).

Researching Undervalued Stocks

This is where the real legwork comes into play. After your have filtered and narrowed your hunt down to less than a handful of stocks, it’s time to delve deeper. Keep in mind, there is usually many reasons why a stock is undervalued. There are problems or perceived problems with the narrative which is causing the market to discount these stocks. Just because the price is low, doesn’t automatically qualify it as an undervalued.

Look at the Company’s Financial Statements

Use your broker’s research tools or free tools like Yahoo Finance to access the most recent Balance Sheet, Cash Flow Statement and Income Statement. You can utilize the “statistics” tab on Yahoo! Finance for these. It’s also helpful to review how the latest earnings report fared against analyst estimates and if the company raised or lower their forward guidance. The reaction can be gauged on a stock chart.

Financial Statements For Undervalued Stocks

Combine Metrics and Look for “Red Flags” 

Keep in mind that having one financial metric or category appear undervalued, doesn’t mean the company is undervalued overall. For example, a company’s low P/B doesn’t help if earnings are declining sequentially. Or a low P/E doesn’t help if the company is losing market share. A strong spike in the earnings resulting from one-time events like a tax refund can be a red flag. 

Look for Significant News 

This is one of the main factors for stock prices to collapse. The most material news will be the quarterly earnings reports and the conference call transcripts. If the company missed earnings estimates and or guided forward earnings and revenues lower, then it may not be very undervalued. If the company reported strong earnings and/or raised earnings estimates but the stock sold off, then it could be an undervalued stock depending on whether expectations were too high, or a sell-the-news reaction happened.

Ask WHY a Company is Undervalued 

This is the goal of the research. Determining whether the negative sentiment is a result of a misguided narrative. Find the obvious reasons why the company shares are undervalued, then determine if the reasons are true or lasting. Has the company sold off its most profitable divisions leaving only the market share losing legacy products? Or perhaps, the company is losing market share now, but transforming its revenue model from a product to a subscription model to improve cash flow forecasts and bolster client retention and growth? Play both sides of the argument and be objective. 

Tips for Investing in Undervalued Stocks

Often, investing in undervalued stocks mean you’re taking the other side of the negative sentiment and may continue to incur more losses until the fundamentals turnaround. Here’s some tips to keep in mind.

Be Patient 

Being ahead of the market takes conviction and most importantly patience. It can take time for the market to share your perspective, but if your research is solid, it may be just a matter of time. Also considering scaling into a position rather than take one entry. This will help you practice patience and possible get a better average price.

Patience When Investing In Undervalued Stocks

Be Aware of Current Investing Trends

Make sure that you are familiar with the current investing themes and trends. The market may be chasing hot momentum driven theme like electronic vehicles and e-commerce stocks while ignoring value stocks. The market may return to value in time, but there is no guarantee. For quicker results, it may be prudent to research undervalued stocks within the current momentum themes.

Don’t Get Too Attached to the Concept of Value

There is a fine line between conviction and stubbornness. If your research is proven wrong or lacking, then don’t hesitate to take a stop-loss and reevaluate or move on. Never get married to a stock that’s “cheap” while the reasons for getting cheaper remain valid. Have a stop-loss set and have the discipline to execute it. Remember, you can always buy back into the stock when the fundamentals and/or technicals improve.

Top Stock Lists

Best 3D Printing Stocks

The stocks of companies that provide 3D printing software, services, and use 3D printing technology in their manufacturing processes are called 3D printing stocks. Similar to robotics, 3D printing is one of the most disruptive technologies in recent times and is set...

Best Electric Car Stocks

Electric car stocks are stocks of the manufacturers of electric vehicles. The sales of electric cars started in 2013 and have demonstrated a steady rally in the past few years. The sales of battery-powered cars will not overpower traditional combustion engine cars...

Best Tech Stocks

Technology stocks are the stocks of the companies that undertake research, development, and distribution of technological products and services. It includes stocks of semiconductor companies, software manufacturers, microchip companies, social media platforms, and...

Best Coal Stocks

Stocks of companies involved in the mining of coal are known as coal stocks. A large number of companies across the globe extract coal from the earth, which is used to generate electricity. Despite the awareness about global warming and greenhouse gas emissions and...

Best High Short Interest Stocks

The total number of shares sold short without being covered, of a particular stock, is called the short interest of that stock. The short interest is represented as a percentage. Thus, stocks with a high percentage (usually over 20%) of short interest are termed as...

Best Cloud Stocks

Cloud computing has been the most disrupting trend in the past decade. The process of saving information from users’ systems in small packets at remote locations on the cloud forms the basis of cloud computing. Cloud computing has changed the way we communicate, live...

Best Railroad Stocks

Stocks of companies that are involved in the transport of industrial and commercial goods through the rail route are termed as railroad stocks. Railroad industry forms an integral part of the US economy; hence railroad stocks provide investors with the opportunity to...

Best Bear Market Stocks

Bear market stocks are the ones that perform well, even during bearish market times when stock prices are falling. Bear markets are the market situations when stock prices are plummeting, investor sentiments are negative, and there is a high inclination towards...

Best Gaming Stocks

The stocks of gaming companies, including pure-play games, video games, mobile games, and competitive games, are called gaming stocks. The gaming industry has evolved by leaps and bounds over the last decade. The evolution of gaming companies and gaming stocks has...

Best Recession Stocks

While all stocks are affected by economic downturns, there are some that fare better than others in economic recessions. Such stocks are called recession stocks. Recession stocks mostly belong to stable and well-established companies that continue to provide regular...

Best Bank Stocks

The stocks of banks and financial institutions are called bank stocks. Such financial institutions are highly regulated and are licensed to hold deposits and give loans to businesses and individuals. Bank stocks experience similar risks and rewards as other public...

Best Cybersecurity Stocks

Cybersecurity stocks are the stocks of companies involved in the protection of the Internet-related world from cyberattacks. With the advent of technology, more and more people are getting dependent on computers and the Internet while, at the same time, more and more...

Best Stocks Under $1

Looking for the best stocks under $1? You came to the right place. Stocks that are priced at under $1 per share are often considered to be penny stocks. Stocks valued at under $1 usually belong to new and small companies, including startups. These companies and stocks...

Best FinTech Stocks

Stocks of fintech companies that implement digital technology to the financial world are known as fintech stocks. Fintech companies apply the advancement in technology to payment systems, e-commerce, cryptocurrencies, money transfers, personal finance, lending, and...

Best Transport Stocks

Stocks of companies that facilitate transportation are collectively known as transport stocks. They include stocks of railroad companies, railway operators, airlines, electric cars, freight carriers, transportation manufacturers, and logistics providers....

Best Telecom Stocks

Stocks of the companies involved in telecommunications constitute telecom stocks. They include stocks of companies that enable telecommunications on a global level, either through the phone or the Internet, wired or wirelessly. With the rapidly evolving telecom space,...

Best Infrastructure Stocks

Stocks of companies that build and maintain the infrastructure of a country, including communications, water, transportation, electricity, and buildings, are collectively termed as infrastructure stocks. It is a broad category of stocks consisting of building bridges,...

Best Index Stocks

Stocks of the mutual funds and ETFs that track and follow the performance of a stock market index are termed as index stocks. Index stocks provide diversification to the investment portfolio by spreading out investments across different asset classes. They also manage...

Best Microchip Stocks

The stocks of companies involved in the design and fabrication of integrated circuits or microchips are termed as microchip stocks. With technology so prevalent in our lives, microchips are increasingly used to program logic and for computer memory to be used in...

Best Clean Energy Stocks

Clean energy stocks are stocks of companies that generate and supply energy through renewable and clean resources. The clean energy industry and stocks have seen an uplift in recent years with worldwide initiatives towards clean and alternative sources of energy. The...

Top ETF Lists

Best Bonds ETFs

Bond ETFs are the specific exchange-traded funds that invest only in fixed-income securities like bonds and treasuries. They differ from bonds in the way that they are traded over exchanges as opposed to the bonds that are sold over the counter. Bond ETFs work as...

Best Vanguard ETFs

Vanguard is the second-largest U.S. exchange-traded fund (ETF) sponsor by assets. In general, Vanguard is widely regarded as one of the most popular ETF-issuers in the world. According to estimates, Vanguard has around $5.3 trillion worth of assets under its...

Best Performing ETFs

ETFs are the pools of money that invest in a variety of stocks, commodities, or a combination of assets. They follow the performance of benchmark indices like the S&P 500 and are traded on the leading exchanges. ETFs are effective modes of investment for investors...

Best Financial ETFs

Financial ETFs are the exchange-traded funds that invest in the stock of financial services companies. These companies include banks, insurance companies, mortgage companies, investment banks, brokerage firms, and companies that provide consumer credit. The...

Best Water ETFs

Water ETFs are the exchange-traded funds that invest in water stocks or stocks of companies involved in the water industry. This includes companies that perform water purification processes, bottle the purified water, and other related products. Water ETFs provide...

Best Semiconductor ETFs

Semiconductor ETFs are the exchange-traded funds that invest in companies that manufacture semiconductors. It includes the companies that directly make semiconductors as well as the ones that supply goods to these semiconductors manufacturers. The semiconductors...

Best High Yield ETFs

There are many types of ETFs, from financial ETFs to energy ETFs, so what sets apart high yield ETFs? High yield ETFs are the exchange-traded funds that invest either in stocks of companies that pay high dividends or in bonds of companies that pay high interest. The...

Best Gold ETFs

Gold ETFs are the exchange-traded funds that invest in gold and gold derivative contracts backed by gold. Investors do not get physical ownership of gold by investing in or redeeming gold ETFs; instead, they only get access to the cash equivalent of the transaction....

Best European ETFs

The exchange-traded funds that invest in the stocks of Europe-based companies are termed as European ETFs. These ETFs not only allow investors to broaden their exposure and geographical diversification, but they also help investors to aim at specific industries or...

Best Energy ETFs

The exchange-traded funds that invest in the securities of energy companies, including natural gas, oil, and alternative energy companies like those for electric cars. The exposure also consists of securities of the companies that produce and transport energy...

Best Defense ETFs

Defense ETFs track the performance of equities of companies in the aerospace and defense sector. These companies include the ones involved in the manufacturing, distribution, and transportation of aircraft and their parts, radar equipment, military aircraft, and other...

Best Blockchain ETFs

Blockchain ETFs are the exchange-traded funds that either track the price movement of bitcoin and other cryptocurrencies or invest in stocks of companies that use the blockchain technology to transform business applications. With the technological advancement and...

Best 3X ETFs

There are many types of ETFs out there. They range from financial ETFs to high yield ETFs, and then there are 3X ETFs. 3X ETFs are the triple leveraged ETFs. These ETFs are designed to amplify the returns of the benchmark indices by three times by using financial...

Best Oil ETFs

There is such a large variety of ETFs that you can invest in. There's financial ETFs and Energy ETFs to name just a few, and then there are Oil ETFs. Oil ETFs are the exchange-traded funds that invest in the stocks of oil companies. They are simple and effective...

Best Biotech ETFs

The exchange-traded funds that invest in the stocks of biotechnology companies are known as biotech ETFs. Biotech companies are mainly involved in revolutionary processes in the healthcare industry, including genetic engineering, molecular biology, and recombinant DNA...

Best Tech ETFs

Technology ETFs are the exchange-traded funds that hold assets including the technology stocks.  Some tech ETFs own all the stocks that are related to technology, while others have a niche focus by buying only semiconductor stocks or only cybersecurity stocks....

Best Small-Cap ETFs

Small-cap ETFs are the exchange-traded funds that invest in the stocks of companies with a market capitalization between $250 million and $3 billion. The portfolio is diversified with small-cap companies and stocks belonging to different sectors and separate...

Best Healthcare ETFs

Healthcare ETFs are the exchange-traded funds that invest in the stocks of healthcare companies. Healthcare is the second largest sector among the S&P 500 index and is an excellent avenue for investments. By investing in healthcare ETFs, investors get to invest in...

Best Fidelity ETFs

Fidelity, the market leader in investment planning and financial services, offers a wide array of 28 ETFs for investors to choose from. The exchange-traded funds of Fidelity help investors create a diversified portfolio of investments by catering to different factors,...

Best Dividend ETFs

A dividend is defined as a distribution of reward from the company's earnings to its shareholders. Investing in dividends is one of the slower and more patient approaches one may take when considering their investments. This type of investing belongs mostly to a more...

Top Stocks