Undervalued stocks refer to the securities that are selling for a price which is lower than their true intrinsic value or their fair market value. To make it simpler, investors can see undervalued stocks as the underdogs of the stock market. The so-called “underdogs” are the companies that are not so popular. These companies may have growth in sales and profits but their stock prices remain the same because they are not noticed by investors, leading to a rather cheap stock price.
To figure out stock’s intrinsic value, investors can evaluate company’s financial statements and fundamentals (cash flow, return on assets, profit generation and capital management, etc.)
Pros and cons of undervalued stock
- Investors can gain a good deal of profits from undervalued stocks since they can buy the stocks at a discounted price and sell them for a higher price.
- Investors can have an opportunity to purchase a share at low prices from promising companies.
- Investors only need to take low risk since those companies are well-established and they are very likely to return to its intrinsic value.
- Investing in undervalued stocks is time-consuming because investors need to spend a large amount of time to analyze the stock market and companies.
- It is possible for investors to conduct a wrong analysis which will cost them a lot.
Who should buy it?
- Investors who can properly analyze the stocks and have substantial knowledge of stock market. Those investors are able to figure out which company shows promising features in the future and they can purchase a share at a discounted price and then sell them at a higher price.
- Investors who choose value investing strategy since they believe that stock market goes up and down in a cyclical way and stock’s price will rise to its intrinsic value.