Stocks: How to Find Undervalued Stocks
A great way to find the best undervalued stocks
in the market is to use a stock screener.
The Best Stock Screener for Beginners
The Best stock screener on the web is
MSN
Money’s Stock screener because it’s simple and easy to use. Simply plug in
your desired screens, and MSN returns a list of stocks that matched your search
criteria.
How to Find Undervalued Stocks
We’re going to conduct a stock screener search
for cheap, undervalued stocks that have consistently grown earnings, and built
shareholder value while minimizing overhead costs and excessive debt.
We’ll limit our search to the following
criteria:
- Any dividend yield
- When I search for stocks, I tend to be lenient on dividend yields because
smaller companies reinvest their dividends into the company instead of paying
them out like larger, more established firms.
- Low P/E Ratio
- We are looking for cheap stocks, so a low P/E ratio is always a good start.
P/E ratios are simply a company’s stock price over its trailing 12 months
earnings, which is a good indicator of whether a firm’s stock is cheap or a
bit overvalued.
- Low Trading Volume
- Stocks with high trading values have already been discovered by Wall Street
and institutional investors. Once trading volume increases, stocks tend to
float more towards their fair valuation.
- High Net Profit Margin
- An indicator of strong management is high net profit margins, the percentage
of net profit earned from revenue.
- Low 12 month relative strength
- Stocks that have underperformed in the last year are some of the best buying
opportunities available. Often when stocks rally and increase in price, we’ve
missed the buying window and lost the chance to make any gains.
- Low Debt to Equity Ratio
- Invest in companies that create cash, not debt. Excessive debt is a warning
sign to investors of a company struggling to pay its bills. If sales turn
flat, how will the company pay off its creditors and still make a profit?
- High Revenue growth year over
year - Year over Year growth rates are better
metrics to use than simply quarter over quarter rates because they show hints
of long-term trends. We only want companies that increase earnings
consistently each and every year.
If your search returns over 20 stocks, pick the
4 to 5 best stocks on the list and forget about the rest. The goal is to pick
the best securities from the list because it would take too much time to analyze
20 stocks, unless you have lots of time on your hands.
By using the best stock screen available, we
limit the search time for potential stock buys, thus maximizing our available
time for researching our stock finds.
Additional Stock Screener Tools on the Web
There are other stock screeners available on
the web that may suit your tastes as well.
MSN
stock screen is a great choice, but by no means is the only one out there.
Here’s a list of other sites that allow
investors to conduct stock screening searches:
Search around for a screener that returns
actionable data for immediate use. This is a great resource tool that every
investor can use.
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