If you’re looking for a list of undervalued stocks, you’ll be hard pressed to find a list of them online somewhere. Stock valuations are a very subjective thing. The matter of whether a particular stock is undervalued or not is a matter of opinion.
The other reason it’s hard to find a good list is because if someone does know of a bunch of undervalued stocks, they’re not going to tell anyone unless they are getting ready to sell them. And even if they do, once a list is publicized and conveniently accessed, people will see it, buy it, drive the price up and it will no longer be undervalued. It will be properly valued. So be wary of lists like top 10 undervalued stocks. By the time you read it, it is probably no longer a good deal.
Finding an Undervalued Stock
Here are some suggestions on how you can find good deals on your own. Stocking picking yourself is always going to be the best way. Many of the hot stocks that end up on some list tend to do well in the short term, but research has shown that over all, stock recommendations that come from financial newsletters don’t perform well over time.
Find Stocks Under The Radar
Find stocks that not many people know about. This is going to be the best place to start. If you are looking at a stock like General Electric (GE) that 30 analysts from major investment firms, plus another million small investors are looking at, it is most likely priced correctly. But if you find a stock that many don’t know about or aren’t watching actively, you might find a gem that has potential to grow, but the market hasn’t picked up on yet. Most undervalued stocks go under the radar.
So let’s go even further. The best place to find stocks that aren’t actively watched are in small cap stocks. It’s a good investment strategy to find potential hot growth stocks. Everyone and their mother is watching large cap companies like Disney, GE, Microsoft and Google. But undervalued small cap stocks aren’t watched as much.
In addition, many large financial institutions, investment funds and hedge funds don’t even bother with small caps. The main reason is that in order for them to buy enough of the stock for it to make a significant impact on their overall portfolio, they have to buy majority, controlling shares.
In order to do that, they must file papers with the SEC. And when they do that everyone will see that this large investment firm is trying to buy controlling shares in this small company and investors will flock to this stock like vultures.
So in the end try to find small companies. You can even look for undervalued penny stocks if you can find the courage to go that cheap. But beware, there are a lot of scams in this category.
Do the Valuation
Once you see a prospective stock, do your own valuation of what you think that company is worth. You will require some fundamental analysis at this point. Don’t look at what the market value is at yet. Just do your own valuation and figure out how much you think it’s worth. This is what the legendary investor Warren Buffett does to find good undervalued stocks.
Then look at what the market cap is, i.e. what the market think it’s worth. If your valuation is considerably higher than the market cap, than you may have found a winner. I say ‘considerably’ because its better to have a wider margin in case your valuation is off.
Then when the market cap reaches or exceeds your valuation, then it’s time to exit the situation and sell your shares. If it exceeds you valuation, there’s really no reason to keep the stock unless you think the market will cause it to rise out of a moment of irrationality.