Will a stock go up if it is undervalued?
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). When a reliable analyst suggests a stock may be undervalued, their opinion could be worth listening to.
The top undervalued NYSE and Nasdaq stocks by sector include P/E ratios as low as 0.1. Value investing holds that investors can identify stocks that are trading below their true value. When the market corrects this pricing error and the price of those stocks increases to match this value, investors see gains.
Investors with a long-term investment horizon may find undervalued stocks appealing, as they have the patience to wait for the market to recognise the stock's true value. By holding undervalued stocks over the long term, investors can benefit from potential price appreciation as the market corrects its mispricing.
to diminish in value; make of less value.
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.
- Aptiv PLC (NYSE:APTV) Number of Q4 2023 Hedge Fund Shareholders: 39. Trailing P/E Ratio: 7.19. ...
- Lantheus Holdings, Inc. (NASDAQ:LNTH) ...
- Lamb Weston Holdings, Inc. (NYSE:LW) ...
- Valaris Limited (NYSE:VAL) Number of Q4 2023 Hedge Fund Shareholders: 47.
Some traders consider stock to be undervalued if the earnings yield is higher than the average interest rate the US government pays when borrowing money (known as the treasury yield). Earnings yield example: ABC has EPS of $10 and the share price is $50. The earnings yield will be equal to 20% ($10/$50).
| S.No. | Company | Industry/Sector |
|---|---|---|
| 1. | Tata Consultancy Services Ltd | IT - Software |
| 2. | Infosys Ltd | IT - Software |
| 3. | Hindustan Unilever Ltd | FMCG |
| 4. | Reliance Industries Ltd | Refineries |
| Company | Face Value (in INR) | Price-to-Earnings (P/E) Ratio |
|---|---|---|
| Jindal Drilling Industries | 5 | 24.10 |
| Oil India | 10 | 4.59 |
| REC Ltd | 10 | 6.32 |
| Meghmani Finechem Ltd | 10 | 14.63 |
Disadvantages of Undervalued Stock
The key risk with undervalued stocks is the challenge of accurately determining a stock's true value. Misjudging a company's financial health or growth prospects can lead to investing in a value trap where the stock remains undervalued or declines further.
Why do investors prefer undervalued stocks?
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). When a reliable analyst suggests a stock may be undervalued, their opinion could be worth listening to.
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio.
The so-called Buffett indicator compares the total market capitalization (share prices times outstanding shares) of all U.S. stocks with the quarterly output of the U.S. economy.
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.
Overvalued stocks are ideal for investors looking to short a position. This entails selling shares to capitalize on an anticipated price declines.
| Stock | Expected Change in Stock Price* |
|---|---|
| Tesla Inc. (TSLA) | 61% |
| Mastercard Inc. (MA) | 14.2% |
| Salesforce Inc. (CRM) | 7.2% |
| Advanced Micro Devices Inc. (AMD) | 11.3% |
| Company (ticker) | Analysts' consensus recommendation score | Analysts' consensus recommendation |
|---|---|---|
| Las Vegas Sands (LVS) | 1.47 | Strong Buy |
| UnitedHealth Group (UNH) | 1.48 | Strong Buy |
| Uber Technologies (UBER) | 1.49 | Strong Buy |
| Assurant (AIZ) | 1.50 | Strong Buy |
The Relative Value of AMZN stock (131.7 USD) is 25% less than its price (174.63 USD). AMZN has upside potential of 23% compared to the average analyst price target. AMZN has positive Free Cash Flow for the last twelve months.
In large part, supply and demand dictate the per-share price of a stock. If demand for a limited number of shares outpaces the supply, then the stock price normally rises. And if the supply is greater than demand, the stock price typically falls.
| Symbol | Name | % Change |
|---|---|---|
| MSCI | MSCI Inc. | -14.24% |
| LKQ | LKQ Corporation | -12.75% |
| DJTWW | Trump Media & Technology Group Corp. | -12.08% |
| CLF | Cleveland-Cliffs Inc. | -9.88% |
Is Apple stock Overvalued?
Fair Value Estimate for Apple
With its 2-star rating, we believe Apple's stock is overvalued compared with our long-term fair value estimate of $160 per share.
| S.No. | Name | CMP Rs. |
|---|---|---|
| 1. | Motherson Wiring | 71.94 |
| 2. | Hindustan Zinc | 410.55 |
| 3. | Lloyds Metals | 737.00 |
| 4. | NMDC | 240.65 |
- SoundHound AI and Sweetgreen are up 174% and 116% so far in 2024.
- SoundHouse AI is seeing its platform for conversational intelligence explode in popularity.
- Sweetgreen has quadrupled over the past year, but it's still a broken IPO with potential to harvest.
| Stock | Sector | Trailing 12-month dividend yield* |
|---|---|---|
| Stanley Black & Decker Inc. (SWK) | Industrials | 3.5% |
| Atmos Energy Corp. (ATO) | Utilities | 2.7% |
| T. Rowe Price Group Inc. (TROW) | Financials | 4.3% |
| Chevron Corp. (CVX) | Energy | 3.9% |
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.
