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Friday, August 13, 2010

How to Explore Most Undervalued Stocks

Every value investor is in search for a stock which is cheap, have consistently grown earnings and built shareholder value while minimizing overhead costs and excessive debt.

We limit our search to the following criteria:

• Any dividend yield – When we search for stocks, we 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.

We at Saral Gyan limit the search time for potential stock buys, thus maximizing our available time for researching our stock finds.

- Equity Desk, Saral Gyan.
(Saral Gyan offers Hidden Gems - Sound & Unbiased Small Cap Stock Research Reports)