How do you know if stock is undervalued?
Price-to-book ratio (P/B)
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.
- If (P/E / EPS growth rate) < 1.0 then the stock is undervalued.
- If 1.0 < (P/E / EPS growth rate) < 2.0 then the stock is near fair value.
- If (P/E / EPS growth rate) > 2.0 then the stock is overvalued.
In general, if the company's current P/E is at the lower end of its historical P/E range or below the average P/E of similar companies, it may be a sign that the stock is undervalued—regardless of recent business performance.
By comparing a company's market capitalisation to its net asset value, the PB ratio assesses whether a stock is undervalued or overvalued. A PB ratio below 1 often signifies an attractive investment opportunity.
- ITC Ltd.
- Asian Paints Ltd.
- Sun Pharmaceutical Industries Ltd.
- Avenue Supermarts Ltd.
- Coal India Ltd.
- Varun Beverages Ltd.
- Eicher Motors Ltd.
- Bharat Electronics Ltd.
| Symbol | Name | Price (Intraday) |
|---|---|---|
| AAL | American Airlines Group Inc. | 13.88 |
| UAL | United Airlines Holdings, Inc. | 52.62 |
| DAL | Delta Air Lines, Inc. | 47.90 |
| BMY | Bristol-Myers Squibb Company | 48.86 |
| Symbol | RSI (14) | Price |
|---|---|---|
| AGBA D | 96.32 | 2.97 USD |
| LABP D | 94.23 | 22.15 USD |
| FEXD D | 89.31 | 11.22 USD |
| HSPO D | 88.98 | 10.94 USD |
Average PE of Nifty in the last 20 years was around 20. * So PEs below 20 may provide good investment opportunities; lower the PE below 20, more attractive the investment potential.
- How does the company make money?
- Are its products or services in demand, and why?
- How has the company performed in the past?
- Are talented, experienced managers in charge?
- Is the company positioned for growth and profitability?
- How much debt does the company have?
What is an overrated PE ratio?
Stocks with high price-to-earning (P/E) ratios can be overpriced. A stock trading at $40 per share with an EPS of $2 would have a P/E ratio of 20 ($40 divided by $2), as would a stock priced at $20 per share with an EPS of $1 ($20 divided by $1). These two stocks have the same price-to-earnings valuation.
Very low vs very high PE ratios
It is arguable that a PE of five or less is not a remarkable bargain. While it might look as if the company's prospects are being viewed too negatively, it is not a bad rule of thumb to filter out companies with a PE below this level.
Key Takeaways. The P/E ratio is calculated by dividing the market value price per share by the company's earnings per share. A high P/E ratio can mean that a stock's price is high relative to earnings and possibly overvalued. A low P/E ratio might indicate that the current stock price is low relative to earnings.
| 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% |
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.
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.
Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOGL), and Advanced Micro Devices, Inc. (NASDAQ:AMD) are some of the stocks that will make you rich in 2024, besides Palantir Technologies Inc. (NYSE:PLTR).
| 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 |
- JD.com Inc. (ticker: JD)
- ClearPoint Neuro Inc. (CLPT)
- Albemarle Corp. (ALB)
- Controladora Vuela Compañía de Aviación SAB de CV (VLRS)
- Nice Ltd. (NICE)
- Bank of Hawaii Corp. (BOH)
| Company (ticker) | Analysts' consensus recommendation score | Analysts' consensus recommendation |
|---|---|---|
| Amazon.com (AMZN) | 1.30 | Strong Buy |
| Microsoft (MSFT) | 1.32 | Strong Buy |
| Delta Air Lines (DAL) | 1.35 | Strong Buy |
| Nvidia (NVDA) | 1.38 | Strong Buy |
Should you buy stock that is undervalued?
One key benefit of investing in undervalued stocks is the potential for high returns. You may see substantial capital appreciation when the market eventually corrects and prices align with the stock's intrinsic value. Undervalued stocks often come with a margin of safety, reducing the downside risk for investors.
Meanwhile, large- and mid-cap growth stocks are 8% overvalued. By sector, industrials, technology, financial services, and consumer defensive stocks look most overvalued. The most undervalued sectors heading into the second quarter are real estate, utilities, and communication services.
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.
The sales per share metric is calculated by dividing a company's 12-month sales by the number of outstanding shares. A low P/S ratio in comparison to peers could suggest some undervaluation. A high P/S ratio would suggest overvaluation.
| 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 |
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