A stock is said to be undervalued when it
is being traded at a much lower price than its usual worth. Usually an
undervalued stock has a lower PE ratio but as an investor you must always
remember that a lower PE ratio does not necessarily mean that the stock is
undervalued. It may be a poor stock as well. So there are some points that
needs to be judged to determine if a stock is actually undervalued or not.
There are many principles and methods that
are used by the experts to determine whether a stock is undervalued or not. In
most cases it is the present financial condition of the company and prediction
about the future of the company decides whether it is an undervalued stock or
not. For example if the stock of an excellent company is priced at Rs. 38 and
it can be easily predicted that the company has a good future ahead then the
stock of that company is determined as undervalued stock. It is the prediction
about the future profit and future interest rate that have a vital part in
determining if a stock is actually undervalued or not.
There are some basic points that are used
to determine undervalued stocks. When a stock has a low
PE ratio these factors need to be judged to find out if the stock is actually
an undervalued stock or is it basically a weak stock.
- The company has a fairly good earning history and
seems stable.
- The business of the company is not based on
specialization of high technology that can be obsolete overnight.
- The company is not going through a financial
scandal.
- The low PE ratio of the company is not the result
of the profit realized from the capital gains.
- The low PE ratio is not for the major decline in the profitability of the company.
At the end undervalued stock is a viable
investment option for the investors as they are all set to rise to their
potential in future.
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