What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


How to Buy Undervalued Stock

Original post by Owen Pearson of Demand Media

An undervalued stock is an investment in a company that is below the company's intrinsic value. These stocks are attractive to investors because if the company performs well, the stock prices may rise to meet the company's value. Like any investment, undervalued stocks offer no guarantee of return; however, they can offer significant upside potential that may add to your investment earnings. Although there is no single strategy for identifying and purchasing undervalued stocks, the Graham's number technique offers a relatively simple means of estimating a stock's value.

Contents

Step 1

Review the company's most recent earnings report. Identify the company's assets, including accounts receivable, inventory, cash and cash equivalents. Identify the company's total liabilities, including outstanding debt and liabilities to customers.

Step 2

Subtract the company's total liabilities from its total assets to obtain the company's approximate value. Find the number of outstanding shares in the earnings report.

Step 3

Divide the company's approximate value of the company by the number of outstanding shares to determine the price per share appropriate for the company's value. For example, if the current value is $100 million and there are 10 million outstanding shares, the appropriate stock price is $10 per share.

Step 4

Find the stock's current price through the trading platform on which the stock is listed, such as NASDAQ or NYSE. If the current price is less than your calculated appropriate price per share, the stock is undervalued.

Step 5

Set up a trading account with a local stock broker or through an online trading brokerage. Fund the account and place a buy order to acquire shares of the undervalued stock.


                   

Tips & Warnings

  • Think long-term when buying undervalued stocks -- these stocks may be undervalued because there is a lack or interest among investors in the company, and the stock may remain undervalued for months or years.

References

About the Author

Owen Pearson is a freelance writer who began writing professionally in 2001, focusing on nutritional and health topics. After selling abstract art online for five years, Pearson published a nonfiction book detailing the process of building a successful online art business. Pearson obtained a bachelor's degree in art from the University of Rio Grande in 1997.


Advertisement