Undervalued shares 2023
Buy quality stocks at a discount: every now and then, stocks trade well below their fair value. Eulerpool shows how much stocks are trading below their fair value. Our algorithms are updated hourly and help find the undervalued stocks.
Reasons for undervalued shares
In the stock market, prices are formed by supply and demand. If prices fall, potential buyers are missing. There can be a few reasons why shares are trading below their true value in the market.
Every company wants to prevent negative news, however, this is not always possible. For example, when companies fail to meet their profit expectations or face the threat of lawsuits, this often leads to a drop in demand. Inexperienced shareholders often sell their shares in these companies as a result, and the price of the stock falls as a result. Although bad news can pose a risk to a company, many investors overreact, resulting in an undervaluation of the stock.
This rash action often comes from the so-called herd instinct. Investors start selling their stocks when others do the same, this is typical human investor behavior. A common reason for this irrational action is online forums where members advise selling or buying. In early 2021, such an artificial high occurred, as Reddit users called for the purchase of GameStop stock, which was then massively overvalued.
Find niche businesses. This is because the stock market world often only reports on the big players such as Apple, Tesla and Amazon. That's why smaller niche companies or companies with less revolutionary business models are uninteresting to many investors, even though they have great potential. Less interest therefore means less buying. Undervalued stocks that can be bought cheaply due to a lack of interest represent a huge opportunity for investors to acquire solid stocks for a low price before the potential is recognized by the masses.
How to find undervalued stocks
To find undervalued stocks, you should study the financial markets. It is important to stay informed about current events in order to act rationally. For example, watch out for negative headlines from companies, as this could lower the share price in the short term.
Crises or correction phases can also depress the prices of shares, even though nothing changes in the companies' business model. In the spring of 2020, at the start of the Corona pandemic, share prices plummeted and many undervalued shares could be bought at bargain prices.
Cyclical influences should be a familiar concept to investors looking for undervalued stocks. Some companies react strongly to economic fluctuations and are thus dependent on the national economy. Typical cyclical companies are found in the consumer goods and technology sectors.
Finally, investors should always get an overview of the company to make an informed decision about the stock. So compare the undervalued stock to its competition and watch what insiders (branch out to Insiderpage) are doing in the company. If the company or its directors are buying their own stock, this may be a sign that the stock is undervalued and has a lot of return potential.
Financial ratios you should know
There are two ratios that every investor who wants to find undervalued stocks should know: the price-to-earnings ratio (P/E ratio) and the price-to-book ratio (P/B ratio).
The P/E ratio is calculated by comparing the share price with the profit. If the share price is significantly lower than the company's profit, the share is undervalued. So a low P/E ratio indicates that a stock is cheap. However, a high P/E ratio does not immediately mean that a stock is overpriced. It is important to compare a company's P/E ratio to the industry average to determine if it is outperforming its peers. In addition, the P/E ratio should not be used as the only indicator because it cannot look into the future.
With the KBV, investors looking for undervalued shares look at the assets that are fixed in the balance sheets. The total equity is then divided by the number of outstanding shares. The current share price is then compared to this book value per share. Shares are considered undervalued if the market value does not equal the book value. If the P/B ratio is less than 1, the share is cheap. However, it is again important not to include the P/B ratio as the only indicator of undervaluation.
After investors have used the P/E and P/B ratios to identify undervalued stocks, other financial ratios should be taken into account. The price-earnings-growth ratio (PEG ratio), the return on equity (ROE), the debt ratio and the third-degree liquidity (current ratio) are further important indicators.
Value Investing wie Warren Buffett
Value investing is an investment strategy, which searches the market for undervalued shares or securities with the aim of buying or investing in them. Since the assets can be purchased at a low price, investors hope to make a large profit potential. In addition, with value investing, investors avoid buying stocks that may be considered overvalued in the market.
Warren Buffett is probably the best-known value investor. The CEO of Berkshire Hathaway has built up his fortune of more than $80 billion largely through the strategy of value investing. Buffett buys undervalued company shares as far below their fair value as possible in order to then participate in their future development.
The basis of value investing is fundamental analysis, which is based on financial ratios. However, factors such as the quality of management, the potential competitive advantage and the strength of the business model also play an important role.
Do not fall for the value trap
When analyzing undervalued stocks, it is important not to fall for the so-called value trap. A value trap appears to be undervalued, but it is not. With the value trap, the stock price usually continues to fall and, in the worst case, can lead to insolvency. There are some indicators that can help to distinguish an undervalued stock from a value trap.
Pay attention to the following factors:
- 1. Stable earnings performance over recent years
- 2. No known scandals
- 3. Positive future outlook
- 4. High credit rating by Moody's and S&P Global Ratings
- 5. Potential competitive advantages or unique selling propositions
- 6. Low PEG Ratio