What Does It Mean If a Stock Is Undervalued?


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Investors love undervalued stocks like consumers love bargains. When a stock is underpriced compared to its book value, it's practically on sale.

Here's a breakdown of what it means when a stock is undervalued (and how you can spot undervalued stocks in time to get in early).

Undervalued stock: Meaning and explanation

A stock becomes undervalued when its market value falls below its intrinsic value (aka true value). Analysts come up with a stock's intrinsic value through methods like a discounted cash flow analysis, PE ratio, or asset-based valuation.

A stock's true value is usually slightly different from its market capitalization, aka the total value of what its sold shares are currently worth in the market. However, when the market value is way above intrinsic value, analysts call out the stock for being overpriced.

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.

How undervalued stocks drive value investing

Oftentimes, investors can be divided into two main camps: Those who practice value investing and those who practice growth investing.

Value investors look for stocks that look underpriced compared to their intrinsic values. According to experts, value investing is winning against growth investing in the long-term war.

"From 1927 through 2019, according to the data compiled by Nobel Prize laureate Eugene Fama and Dartmouth professor Kenneth French, over rolling 15-year time periods, value stocks have outperformed growth stocks 93% of the time." — Dr. Robert Johnson, finance professor at Creighton University

What are the most undervalued stocks of 2021?

Here are some stocks that experts suggest are undervalued in November:

  1. Intel (NASDAQ:INTC): While Intel stock is not necessarily trading at a discount, its potential is strong compared to its current valuation.

  2. Delta Airlines (NYSE:DAL): Delta doubled earnings expectations in its latest quarter. Holiday travel could mean higher value to come.

  3. American Express (NYSE:AXP): Despite the fact AXP is close to all-time highs, it still seems undervalued. American Express is also tied to travel thanks to its airline rewards.

  4. Advanced Micro Devices ((NASDAQ:AMD): Demand is strong for AMD's semiconductor chips. The company can't keep up and its shares are trading at a discount.

  5. Target (NYSE:TGT): When compared to the multiline retail industry, Target shares appear to be undervalued.

How to identify undervalued stocks with potential

Here are some ways to look for undervalued stocks:

  • Consider stock screeners like Morningstar to help streamline the undervalued stock discovery process.

  • A consistently high dividend yield is often a sign of an undervalued stock.

  • Find out if the PE ratio is low. If it is low, find out why. If there are no major issues causing a low PE ratio, the stock could be undervalued.

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