Is it smart to buy undervalued stocks?
Undervalued stocks are company shares that are trading for less than their intrinsic value. The advantage of investing in undervalued stocks is that these securities often have an attractive risk/reward profile.
Additionally, undervalued stocks often have lower investment risk than their overvalued counterparts. Since these stocks are priced below their fundamental value, they may be less susceptible to significant drops in price, offering a level of protection during market downturns.
Undervalued stocks are stocks that trade below their assumed value. They often have a track record of being profitable, and the potential for long-term growth, but the stock market hasn't recognized that yet.
What happens when a stock is undervalued? Ideally, it's more likely to experience future growth, which could mean capital gains for investors depending on their individual cost basis (or buying price).
A Risky Proposition
Low-priced securities often are considered speculative investments, which you should only make with money that you can afford to lose. They tend to be volatile, and they trade in low volumes, which means they're subject to price fluctuations from even relatively small trades.
| Symbol | Name | PE Ratio (TTM) |
|---|---|---|
| LAUR | Laureate Education, Inc. | 17.85 |
| GE | General Electric Company | 19.30 |
| HAL | Halliburton Company | 11.97 |
| VTRS | Viatris Inc. | 8.76 |
Price-to-Earnings (P/E) Ratio: A lower P/E ratio of a stock suggests that a stock may be undervalued, as investors are paying less for each unit of earnings. Price-to-Book (P/B) Ratio: A lower P/B ratio implies that the stock may be undervalued relative to its book value.
| Stock Name | Sub-Sector | PE Ratio (%) |
|---|---|---|
| Phoenix Mills Ltd | Real Estate | 32.44 |
| 360 One Wam Ltd | Investment Banking & Brokerage | 33.79 |
| Hindustan Aeronautics Ltd | Aerospace & Defense Equipments | 34.42 |
| Saregama India Ltd | Movies & TV Serials | 36.15 |
When a stock is overvalued, it presents an opportunity to go “short” by selling its shares. When a stock is undervalued, it presents an opportunity to go “long” by buying its shares. Hedge funds and accredited investors sometimes use a combination of short and long positions to play under/overvalued stocks.
The top undervalued stocks on the NYSE or the Nasdaq for February 2024 that are trading for under $50 include Globus Maritime, Diversified Healthcare Trust, Telesat, Smart Sand, Star Equity Holdings, Vast Platform, Xcel Brands, Ebang International Holdings, OptimumBank Holdings, Profire Energy, and Pacific Gas & ...
How do you pick undervalued stocks?
Price to Earnings Ratio
PE Ratio is one of the metrics used to identify undervalued stocks. The PE ratio compares the current market value of a stock with its earnings per share. Typically, undervalued stocks will have a low PE ratio. Remember that the standard PE ratio differs from industry to industry.
With its 2-star rating, we believe Apple's stock is overvalued compared with our long-term fair value estimate of $160 per share. Our valuation implies a fiscal 2024 adjusted price/earnings multiple of 25 times, a fiscal 2024 enterprise value/sales multiple of 7 times, and a fiscal 2024 free cash flow yield of 4%.
Finding undervalued stocks isn't just about finding cheap stocks. The key is to look for quality stocks at prices under their fair values, rather than useless stocks at a very low price. The difference is that good quality stocks will rise in value over the long term.
| Stock | 2024 performance through Jan. 31 close |
|---|---|
| Dyne Therapeutics Inc. (DYN) | 60.9% |
| Edgewise Therapeutics Inc. (EWTX) | 62.9% |
| NewAmsterdam Pharma Co. NV (NAMS) | 83.3% |
| Super Micro Computer Inc. (SMCI) | 86.3% |
Once you get your money working for you, it can grow quickly even if you aren't investing a lot. Investing $1 a day can turn into tens of thousands of dollars over a long period of time. You can get started by opening a brokerage account and researching low-cost index funds.
Sure, some penny stocks turned out to be massive success stories, like Apple, Ford Motor, and Monster Beverage. Find a similar success story like those top penny stocks, and you stand to make a fortune. However, you have to be willing to do the research to find them in a sea of duds.
Warren Buffett's Berkshire Hathaway (BRK.A) commands the No. 1 position, with an impressive stock price of over half a million dollars. Swiss chocolatier Lindt & Sprüngli (LISN) holds steady at No. 2 with its six-figure stock price of CHF 123,433.
Amazon has 19.00% upside potential, based on the analysts' average price target. Is AMZN a Buy, Sell or Hold? Amazon has a conensus rating of Strong Buy which is based on 41 buy ratings, 0 hold ratings and 0 sell ratings.
Assuming you do go down the road of picking individual stocks, you'll also want to make sure you hold enough of them so as not to concentrate too much of your wealth in any one company or industry. Usually this means holding somewhere between 20 and 30 stocks unless your portfolio is very small.
The opening period (9:30 a.m. to 10:30 a.m. Eastern Time) is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time. A lot of professional day traders stop trading around 11:30 a.m. because that is when volatility and volume tend to taper off.
What is the best stock to invest $1 in?
- Invitae Corporation (NYSE:NVTA)
- Nektar Therapeutics (NASDAQ:NKTR)
- Jasper Therapeutics, Inc. (NASDAQ:JSPR)
- Amarin Corporation plc (NASDAQ:AMRN)
- Chimerix, Inc. (NASDAQ:CMRX)
- Gossamer Bio, Inc. (NASDAQ:GOSS)
- Kezar Life Sciences, Inc. (NASDAQ:KZR)
| Symbol | RSI (14) | Price |
|---|---|---|
| VKTX D | 95.70 | 85.05 USD |
| JANX D | 94.90 | 49.75 USD |
| OCEA D | 91.72 | 1.96 USD |
| STRC D | 91.44 | 1.71 USD |
Dividend stocks are considered safer than high-growth stocks, because they pay cash dividends, helping to limit their volatility but not eliminating it. So dividend stocks will fluctuate with the market but may not fall as far when the market is depressed.
If you buy an overvalued stock, it will likely end up underperforming the market as the price eventually falls back to its real value.
If investors purchase overvalued stocks at inflated prices, they will likely experience significant losses when the price eventually corrects its intrinsic value. This can cause long-term damage to an investor's portfolio and retirement savings.
