When the share market shows its true colors, swings unpredictably, investors panic. The important asset for an investor is to maintain cool and not trade (buy or sell) with a confused mind. When the market goes down day after day, spotting the undervalued shares is a difficult task, but worth trying. Try to identify the intrinsic strength of a company; may be the share value will pick up its deserved price level, sooner than your expectations. This has happened with shares of many companies, after the recent severe recessionary trends.
The initial process-research and analyze
Make a listing of the stocks that you are interested in by the random study of the market conditions that affect the particular segment of the industry. Once this is done, make an in-depth analysis of the data and the behavior of the share price for the last 52 weeks. You will be able to identify the trends of the price movements. When you are able to locate an undervalued share, know that you hit the hidden treasure. The task is the challenging one. One needs to make study of the balance sheet, the marketability of the existing as well as the new products the company may project to introduce in the market, diversification plans, if any, and the chances of their success etc.
Have a close look at the price-to-earnings ratio and compare it with industries in the same segment. The P/E ratio is the stock price divided by the preceding 12 months. If the P/E ratio is lower in comparison with those of similar companies, as per the reputed indexes like Nasdaq, the stock price is undervalued. This is one important yardstick, and other relevant factors also need to be considered along.
When you examine the trading chart, you notice heavy trading in shares. When this trend exists for a noticeable period, it means that the market forces-the brokers, traders and financial institutions-have since identified the share and its potentiality for growth. Low trading under such circumstances indicates that the timing to buy is favorable to you. Buy well in time, or else you miss the real benefit that you can derive from the rising market trends as for this stock.
Debt-to equity ratio
Examine whether the company is generating profits. The ideal stock should have the low debt-to-equity ratio. This means, the income of the company is more than its expenditure, which is a happy position from the point of view of the investor. If a stock loses in short term (may be due to the seasonal nature of its products), it doesn’t reflect adversely on the overall strength of the company. A company may produce goods for 10 months and sell the entire lot within two months.
General characteristics of undervalued stocks
Such stocks have the capacity to withstand the financial crisis. Recession doesn’t affect them to a great extent. They could be the companies that manufacture consumer durables and articles of daily needs. These companies are run by an honest management and have no entanglement in financial scandals. Notwithstanding the best recommendations by your stock broker or opinions by financial analysts in the stock journals, here is a fit case where your own analytical abilities and judgment are invaluable, to zero in on an undervalued share.