Investing in Undervalued Stocks is the Process of Buying Stocks Lower Than They Should be and Riding Them Up to Profits
Warren Buffett once said, “I make no attempt to forecast the market—my efforts are devoted to finding undervalued securities.” As the pre-eminent investor or our time, Warren knows what he’s talking about. So let’s be more like Warren Buffett and I’ll explain undervalued stocks.
The definition of undervalued stocks may seem obvious -- stocks that are undervalued. This doesn’t necessarily mean they are inexpensive though.
Virtually every investor has heard the age-old wisdom of “buy low, sell high,” but most don’t have a system for doing that. As a result they end up doing just the opposite in many cases. A stock gets hot so they jump on the bandwagon—buying high. And when a correction or downturn comes along, they panic and dump the stock—selling low.
But buying undervalued stocks and selling when they are up is literally the classic “buy low, sell high” strategy in action—and a great way to make money.
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How to Find Undervalued Stocks
In the 1920’s Benjamin Graham wrote “The Intelligent Investor.” The objective of Graham’s strategy is to identify unappreciated stocks and show you how to find undervalued stocks that meet certain criteria for quality and quantity … stocks that are poised for stellar price appreciation.
Graham recommended sticking to stocks that have ratings of B or better using Standard & Poor’s Earnings and Dividend Rating and also buying companies with Total Debt to Current Asset ratios of less than 1.10. Graham also advised finding companies with positive earnings per share growth during the past five years with no earnings deficits, and to invest in companies with price to earnings per share (P/E) ratios of 9.0 or less.
Graham has a whole list of criteria for picking undervalued stocks, and those are just a few.
At Cabot, we also like to find out why a stock is selling at a bargain price before investing. Is the company competing in an industry that is dying? Is the company suffering from a setback caused by an unforeseen problem? The most important question, though, is whether the company’s problem is short-term or long-term and whether management is aware of the problem and taking action to correct it. You can put your business acumen to work to determine if management has an adequate plan to solve the company’s current problems.
If you’re really serious about finding undervalued stocks and investing, I recommend subscribing to Cabot Undervalued Stocks Advisor.
Combining both growth and value in her growth-at-a-reasonable price strategy, Chief Analyst Crista Huff uncovers stocks with strong growth catalysts that are selling at attractive valuations in our Cabot Undervalued Stocks Advisor which offers three portfolios in Cabot Undervalued Stocks Advisor: Growth, Growth & Income and Buy Low Opportunities.
Growth Portfolio stocks have bullish charts, strong projected earnings growth, little or no dividends, low-to-moderate P/Es and low to moderate debt levels.
Growth & Income Portfolio stocks have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate P/Es and low-to-moderate debt levels.
Buy Low Opportunities Portfolio stocks have neutral charts, strong projected earnings growth, low-to-moderate P/E ratios and low-to-moderate debt levels. Some of these stock may pay dividends. You may need to wait patiently for these stocks to climb.
Choose Buy- and Strong Buy- rated stocks from all three portfolios to diversify your personal portfolio and get started investing in undervalued stocks.
Do you have questions about investing in undervalued stocks? Leave a comment below.
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