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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » How to find undervalued shares

How to find undervalued shares

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1How to find undervalued shares Empty How to find undervalued shares Mon Jul 14, 2014 9:37 pm

Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value. For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock. Numerous popular books discuss undervalued stocks. Examples are The Intelligent Investor by Benjamin Graham, also known as "The Dean of Wall Street," and The Warren Buffett Way by Robert Hagstrom. The Intelligent Investor puts forth Graham's principles that are based on mathematical calculations such as the price/earning ratio. He was less concerned with the qualitative aspects of a business such as the nature of a business and its management. Graham's ideas had a significant influence on the young Warren Buffett, who later became a famous US billionaire.

Warren Buffett, also known as "The Oracle of Omaha," stated that the value of a business is the sum of the cash flows over the life of the business discounted at an appropriate interest rate. This is in reference to the ideas of John Burr Williams. Therefore, one would not be able to predict whether a stock is undervalued without predicting the future profits of a company and future interest rates. Buffett stated that he is interested in predictable businesses and he uses the interest rate on the 10-year treasury bond in his calculations. Therefore, an investor has to be fairly certain that a company will be profitable in the future in order to consider it to be undervalued. For example, if a risky stock has a PE ratio of 5 and the company becomes bankrupt, this would not be an undervalued stock. Some qualities of companies with undervalued stocks are:

The company's earning history is stable.
The company does not specialize in high-technology that can become obsolete overnight.
The company is not in the middle of some financial scandal.
The company's low PE ratio is not due to profits realized from capital gains.
The company's low PE ratio is not due to a major decline in profitability.
The company's PE ratio is below its average PE ratio for the last 10 years.
The company is selling at a price below its tangible asset value.
The company's trailing 3-years earnings has risen over the past 10 years.
The company's credit rating is AAA, AA, or A, or even better, there is no rating because there is no debt at all.
The company did not have a loss during the last recession.

One can better check for the EPG ratio also for calculating under valued stocks.
An excellent stock at a fair price is more likely to be undervalued than is a poor stock at a low price, according to Charles Munger, the Harvard-educated partner of Buffett. An excellent stock continues to rise in value over the long term, while a poor stock declines in value. An undervalued stock will usually have a low PE ratio. For example, a PE ratio of 10 is much better than a PE ratio of 20. Some high-flying Internet stocks had PE ratios of 30, 40, 50, 100, 200 or more in year 2000, prior to the bursting of the Internet stock bubble. Investors of these Internet stocks did not purchase undervalued stocks, as they later learned.

2How to find undervalued shares Empty Re: How to find undervalued shares Mon Jul 14, 2014 10:02 pm

NZ BOY

NZ BOY
Moderator
Moderator
this is a good article thanks

3How to find undervalued shares Empty Re: How to find undervalued shares Mon Jul 14, 2014 10:28 pm

shadow walker

shadow walker
Vice President - Equity Analytics
Vice President - Equity Analytics
good writing.. Thanks dear

4How to find undervalued shares Empty Re: How to find undervalued shares Mon Jul 14, 2014 11:00 pm

ecse


Manager - Equity Analytics
Manager - Equity Analytics
Thanks

5How to find undervalued shares Empty Re: How to find undervalued shares Tue Jul 15, 2014 12:28 pm

pirate

pirate
Senior Equity Analytic
Senior Equity Analytic
pirat  Sthoothiiii   pirat

6How to find undervalued shares Empty Re: How to find undervalued shares Tue Jul 15, 2014 11:51 pm

lakmal87


Manager - Equity Analytics
Manager - Equity Analytics
Thanx

7How to find undervalued shares Empty Re: How to find undervalued shares Sat Jul 19, 2014 3:13 pm

VALUEPICK

VALUEPICK
Expert
Expert
By reading above article we can find value stocks in the market. CSE is a Value den.

8How to find undervalued shares Empty Re: How to find undervalued shares Sat Jul 19, 2014 7:02 pm

SHARK aka TAH

SHARK aka TAH
Expert
Expert
@Quibit wrote:An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value. For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock. Numerous popular books discuss undervalued stocks. Examples are The Intelligent Investor by Benjamin Graham, also known as "The Dean of Wall Street," and The Warren Buffett Way by Robert Hagstrom. The Intelligent Investor puts forth Graham's principles that are based on mathematical calculations such as the price/earning ratio. He was less concerned with the qualitative aspects of a business such as the nature of a business and its management. Graham's ideas had a significant influence on the young Warren Buffett, who later became a famous US billionaire.

Warren Buffett, also known as "The Oracle of Omaha," stated that the value of a business is the sum of the cash flows over the life of the business discounted at an appropriate interest rate. This is in reference to the ideas of John Burr Williams. Therefore, one would not be able to predict whether a stock is undervalued without predicting the future profits of a company and future interest rates. Buffett stated that he is interested in predictable businesses and he uses the interest rate on the 10-year treasury bond in his calculations. Therefore, an investor has to be fairly certain that a company will be profitable in the future in order to consider it to be undervalued. For example, if a risky stock has a PE ratio of 5 and the company becomes bankrupt, this would not be an undervalued stock. Some qualities of companies with undervalued stocks are:

The company's earning history is stable.
The company does not specialize in high-technology that can become obsolete overnight.
The company is not in the middle of some financial scandal.
The company's low PE ratio is not due to profits realized from capital gains.
The company's low PE ratio is not due to a major decline in profitability.
The company's PE ratio is below its average PE ratio for the last 10 years.
The company is selling at a price below its tangible asset value.
The company's trailing 3-years earnings has risen over the past 10 years.
The company's credit rating is AAA, AA, or A, or even better, there is no rating because there is no debt at all.
The company did not have a loss during the last recession.

One can better check for the EPG ratio also for calculating under valued stocks.
An excellent stock at a fair price is more likely to be undervalued than is a poor stock at a low price, according to Charles Munger, the Harvard-educated partner of Buffett. An excellent stock continues to rise in value over the long term, while a poor stock declines in value. An undervalued stock will usually have a low PE ratio. For example, a PE ratio of 10 is much better than a PE ratio of 20. Some high-flying Internet stocks had PE ratios of 30, 40, 50, 100, 200 or more in year 2000, prior to the bursting of the Internet stock bubble. Investors of these Internet stocks did not purchase undervalued stocks, as they later learned.
The Book on Intelligent Investor is Expert Chamber under Graham Number. I posted the link to the book 1 or 2 weeks ago.  Very Happy 

Read Read and Read you will increase your knowledge and wealth if you stick by it.

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