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Friday, September 2, 2016

How to find under-valued stocks (even when a stock market is trading near its lifetime high)

The Indian stock market has rallied almost 30% from its Feb '16 low and is within hand-shaking distance of its lifetime high touched back in Mar '15.

Many stocks are touching 52 week highs on a daily basis. Some have touched their lifetime highs. 

Small investors are in a quandary. Should they jump on to the bandwagon and ride the bull market, or should they wait for a correction to enter?

The answer is: Neither. Instead, they should do their homework. Try to find undervalued stocks. 

Are there any undervalued stocks left in the market? Haven't all of them been bought already?

Those are valid questions - specially when a market is near its lifetime high. The truth is, there are undervalued stocks available under all market conditions. They are more difficult to find near market tops.

So, what is the 'secret formula' for finding undervalued stocks? There isn't any. 
Finding undervalued stocks requires methodical, 'grunt work'.

The following five metrics will get you started on your quest:

1. P/E (Price to Earnings) ratio
2. P/BV (Price to Book Value) ratio
3. Debt/Equity ratio
4. Free Cash Flow
5. PEG (P/E to Earnings growth) ratio

The first three ratios are readily available from any finance website. The last two may need to be calculated from Annual Reports.

Read more about the five metrics from this article.

Not interested in doing grunt work to find undervalued stocks? Leave the job to experienced fund managers. Invest in equity or balanced funds.

Related Post
How to pick Stocks for Investment - Part III

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