How to find stocks that are undervalued?

When the market falls, investors might come across the thought, is this the right time to invest in the market for the long term? If yes, then how to find stocks that are undervalued ? Well, you have the right set of questions , to which we will let you find the answer in this blog. 

 So, in this blog we are going to learn how to find stocks that are undervalued using Screener. 

First of all , let's make this clear: whatever strategy we are going to discuss in this blog is evergreen, not only at the time of market correction i.e whenever you are searching for undervalued investment opportunity for the long term, try this strategy. 

Before understanding the strategy, let's understand the market cycle and meaning of undervalued stocks.

What’s Happening in the Market?

For the past few days, the Nifty has been interspersing sideways movement which has left traders and investors in a quagmire. Already there has been a 5% downturn that has been recorded in the market. Many of you are willing to ask “How is it now?” Is it enough to sit tight and wait for further corrections or is it the time to make purchases?

Well, markets follow the cyclic nature–as does the movement of wave along the sea shore. They can rise to certain levels then plunge to low levels and yet keep progressing. Same is the position of the stock market. Right now, it appears to be going down but when one looks into the long term picture, it is an upward trend.

 

Knowing the Market Cycle

A cycle is formed. Like an elementary wave that moves in its up or down. Over the past 10 years (2015-2024), there have been no less than five significant corrections and at least one wonderful storm! But it will surprise you? Investors who have stayed in the market and sailed through these episodes are now sitting on super profits.

However, when you are investing in good quality stocks for a long period, there are less panic as to the ups and downs since usually the trend is up. It is important to always bear in mind: there will always be corrections, change is the only constant and only clever investors will use such occasions to acquire assets which are under priced.

 

Are we at a point to pull the trigger?

Now let us address this question: Is it always a good idea to purchase stock following a 5 % correction? Such an answer is not straightforward all the time. Therefore, a prudent investor will only invest in a stock if its intrinsic value is more than its current market price. Why is that? Because intrinsic value means the truth about a stock's worth and includes variables such as:

Earnings growth

Competence of management

Financial position

Business Framework

So if a stock is trading at a discount to intrinsic value then it is in the undervalued region and that is where the bargains are picked up.

Purchasing techniques

You do not need to compute, say, intrinsic value by yourself. There are screeners which perform this task for you. Here’s what to look for in the screener:

Intrinsic Value – Current Market Price: The result should show a positive value, meaning the stock is undervalued.

Price to Earnings (PE) Ratio-To Industry: The stock is not expensive relative to its competitors.

Market Cap-Rs 10000 crore to Rs 30000 crore: Here you are ensuring that you are looking at quality mid cap companies.

At the end of the analysis, you will be surprised by some stock names filtered out – gems which are waiting to be tapped in. This is one of the beauty of aforestated screener: For example:

Tata Elxsi

Raymond

NCC

Chambal Fertilizer

These are few of the quality stocks which can help you capitalize on the market correction.

Final Thoughts

Even though the recent drop in the market would sound alarmist, it is for all purposes, a principal restorative feature of any cycle. In other words, there is no need to be provoked and making unnecessary actions. Look for companies that offer their shares at a discount to their economic value and have good growth prospects.

I have found it helpful to invest in good businesses with a very long term in mind. I have found that the fluctuations become less worrisome because I have experience in stock market investing where I normally experience an uptrending market. One thing which cannot be stressed enough is: corrections are normal and any serious investor waits for such times to accumulate good stocks.

 

 

Is this the right moment to invest?

Firstly, let's discuss whether it is worthwhile to invest anytime after a 5% correction in the Index. The questions do not have a quick-fix solution. You must seek to purchase those stocks whose market price is less than their intrinsic value. Intrinsic value means what the stock actually worths, considering factors like:

Growth in earnings

Capability of management

Financial stability

Business Plan

Undervaluation, that is potential upside and enhancement of stock value, is what we look for more on this.

The Correct Way of Choosing Stocks

You do not need to determine intrinsic value by yourself. Screeners exist that do this for you. As such, this is required of the screener:

Intrinsic value more than Current Market Price. To imply that, the stock is highly undervalued.

The Price-Earnings ratio is less than the industry average P/E: The stock is relatively less expensive when compared to its industries.

And a Market Cap of Rs 10,000 crore to Rs 30,000 crore: This ensures you are dealing with good mid-cap companies.

When you apply these filters, you will get some unexpected stock names, so to speak, jewels which are still to be discovered. Some examples from the screener include:

Tata Elxsi

Raymond

NCC

Chambal Fertilizer

These are a few of the quality stocks that will enable you to take advantage of the correction in the Indian markets.

Final Opinions

The recent decline in the market may appear as a point of concern, but it happens to be a part of the cycle. The most important thing is to remain focused and avoid panic. Buy stocks that are undervalued and have promising prospects.