Investing in stocks is one of the most profitable methods to grow your wealth long-term. Over the past 20 years, the stock market generated an average return of 10% per year. Investing in undervalued stocks can increase the return rate further. But how to find undervalued stocks, what tools to use and what key figures to look at?
That’s what you are going to find out in this blog post.
Use Tools to Find Undervalued Stocks
Before we get into the details on how to find undervalued stocks in terms of the specific criteria to look for, I’ll introduce you to the best tools that help you find those undervalued stocks.
That’s an important part since what does it help you if you know what exact parameters you are looking for, but when you have to analyze manually, investing hours or days of your valuable time?
A great tool that helps you to identify the best undervalued stocks in minutes comes up with a list of companies that match your criteria. Here are my 5 favorite tools.
1. Seeking Alpha Premium
Seeking Alpha is a stock research website and has quickly become a go-to source for finding undervalued stocks. What started early on as a website with basic financial market news, analysis, and a community of investing enthusiasts has now become of of the worlds-leading finance websites with an enormous offering.
The most exciting part of Seeking Alpha is the Premium section, where you can find and compare top stocks and ETFs and access an excellent stock screener (for U.S.-listed stocks and ETFs) and a key stats comparison tool.
The advantage of the Premium version is that every comparison table includes insights into the proprietary quant ratings section, along with Seeking Alpha and Wall Street analyst ratings and grades for valuation, growth, profitability, momentum and more. Here, you can easily sort and filter for the best possible stocks to invest in.
The free 14-day trial is surely the best way to get started testing Seeking Alpha Premium inside out, considering if it is worth it for you to continue subscribing after the free trial for $239 per year.
The benefits are clearly more comprehensive, and you find all details with user perspectives in my Seeking Alpha Review.
2. StockRover
Stock Rover is a powerful stock research tool for value investors and fundamental analysts. It comes with an integrated stock screener and a user-friendly interface. Finding potentially undervalued stocks is as easy as 1-2-3 by using Stock Rover.
It is possible to rank and sort company valuations and fundamentals by hundreds of key financial data points. Users can compare companies versus their peers, analyze past performance and dividend yield and visualize undervalued companies in comparison tables.
In addition, it is possible to connect multiple brokerage accounts, which makes Stock Rover one of the best portfolio analysis tools for investors and traders. The pricing ranges from $7.99 per month for the Essential version to $27.99 per month for the Premium Plus version. Annual payments reduce the monthly average price and are available from $79.99/year to $279.99 per year.
3. Finviz
Finviz is a that I have used for over 20 years, and it continuously convinces with its excellent market overview on the homepage and the free stock screener where you can filter U.S.-listed stocks, ETFs and indices based on 57 criteria like market cap, P/E ratio, performance figures, etc.
When I want to sort the currently 8,533 stocks based on one or multiple criteria, this is my go-to source for quick insights. However, the free version is limited in terms of functionalities. For example, you can’t export the results as a spreadsheet with the free version. However, Finviz also has a paid version.
Finviz Elite is a lower-priced analysis tool with real-time and extended trading hours stock quotes, advanced charting, correlations analysis, backtest functionalities, alerts and email notifications. You can also use a more advanced screener with more filters and export functionalities for $39.50 per month or $299.50 per year.
4. TrendSpider
TrendSpider is the ultimate charting tool for technical analysis and visualization. Hundreds of trading indicators, various chart styles and time frames are available. In addition, the multi-charting features let users visualize up to 16 different stocks on one page.
TrendSpider is a Sofware as a Service product (SaaS). This is another benefit since it works with any browser without software installation, and mobile users can use the reliable TrendSpider app for iOS and Android.
The stock’s current market price is tracked in real-time.
While previous performance is never a guarantee for future performance, a chart can be helpful in understanding where the stock price stands relative to the all-time high, all-time low or IPO price.
The tool can also be described as an all-in-one solution since features like options flow analysis, trade alerts, backtesting, trading bots and stock market news are integrated, besides stock research, screening and advanced charting.
The pricing starts at $39 per month and $396 per year.
5. Stock Picking Services
There are always two paths to go when investing by either doing all the analysis by yourself or relying on information provided by others. Investment newsletters are a great choice if the latter is your favorite approach. Stock picking services archive average returns of more than 25% annually compared to a 10% average in indices like the S&P500 or Dow Jones Index.
I consider The Motley Fool Stock Advisor the unbeaten leader in this segment with a great long-term performance since inception, and over 175 of their stock picks up by more than 100%. One thing to like is that they always use the closing price of the recommendation day as a reference point for profit calculation, which makes it possible to archive similar returns since the stock picks are announced during market hours.
Other benefits include free access to previous stock picks and email updates alongside the two stock recommendations per month.
Look at Company Ratios
An exciting way to identify undervalued stocks is to look at freely available company ratios that are included in nearly any free analysis tool. The ratios tell you more about the profitability of a company, it’s earnings value and more.
An important aspect here is that there is no exact figure in all ratios that directly indicates an undervalued stock by looking just at one stock. Instead, it is reasonable to compare an analyzed company against its peers to evaluate if the stock is an undervalued stock in its sector or if another company in the sector may have better ratios indicating to be the better investment.
P/E Ratio
A low P/E ratio can indicate that the analyzed stock is undervalued since the Price-Earnings ratio tells you how much money you have to invest for every $1 of the company earnings. The lower the ratio, the more earnings you get per dollar invested. Yet, the ratio is only as good as the earnings projections of a company. Therefore it is important to check whether the company typically holds its projections.
PEG Ratio
The PEG uses the P/E ratio (price per share divided by earnings per share) and divides it by the expected earnings growth, where the combination of a low PEG ratio and earnings surprises may indicate that the stock is undervalued at its current price.
D/E Ratio
The debt-equity ratio compares a company’s total debt with the total shareholder’s equity and indicates how much debt a company has for every $1 of equity. If the D/E ratio is high, it could indicate that the firm gets a majority of its money from lending.
Current Ratio
When you divide a company’s current assets by the current liabilities, you get the current ratio, which helps to determine a company’s ability to pay its debts. If the current ratio is low, the company might be in trouble.
P/B Ratio
The P/B ratio takes the price per share and divides it by the book value per share, whereas an undervalued stock tends to have a P/B ratio below 1.
Earnings Yield
The earnings yield simply divides the announced earnings per share by its price per share, where a yield above the treasury yield is typically a good sign since it means that the company earns more with its business than it would get based on the current interest rate.
Return on Equity
Return on equity (ROE) is calculated as net income divided by shareholder’s equity. An attractive stock might have a high ROE. You can compare the ROE of a given stock to the ROE of other stocks within the same sector to identify valuable investment opportunities.
Consider the Market Capitalization
When the market catapulted from its lows in October 2022 by nearly 30% to its current highs in just under one year, something interesting happened. While many growth stocks are still beaten down with low momentum to the upside, the ten stocks with the highest market capitalization were the clear winners in that time frame and pushed the indices higher.
We currently have 5 trillion market cap companies, but 109 companies above 100 billion. If you sort those stocks in your stock screener by market cap and use free stock charts to visualize the price development using a weekly or monthly time frame, you quickly see how well they did.
One reason is the enormous liquidity of those companies in terms of traded shares and common shares, which makes it possible for mutual funds and other institutional investors to invest significant parts of their money in those companies.
Conclusion about Finding Undervalued Stocks
The best time to research undervalued stocks is the time during a recession or at any time in an exaggerated bear-market cycle when the stock market is at all-time highs. As the stocks within a stock index, it’s much harder to find valuable investment opportunities that keep profitable once the market consolidates.
Psychologically, there is a big difference if you start investing and your account keeps in the green areas or if your investments turn green at first and then hit the red numbers during a temporary market-breathtaking cycle. The latter may cause you to close the whole investment just because you see your portfolio in the red, while the decline from the top is overall the same.
That’s why it’s better to either invest multiple times to use the dollar-cost averaging effect (DCA) to your advantage or start with bigger one-off investments only in bear markets where the chances for a turnaround from a bear to a new bull market increase over time.
Also, please keep in mind investing in undervalued stocks does not equal investing in stocks that only rise. Instead, it should be seen as an investment in stocks that can increase in price more than its peers and decline less than its peers during bear markets due to their undervalued status.
