No matter what kind of investor you are, be it a value investor or a growth investor, a lion’s share of investors are very much eager to find the best undervalued stocks to buy right now.
You can follow one basic principle to find the best undervalued stocks. You can do a thorough search for fundamentally sound companies available at attractive valuations for the long term horizon.
But why stick to a company for the long run?
Your investment generates revenue. And this revenue again can generate revenue when reinvested. In other words, you can gain the advantage of compounding. Your initial investment of $50,000 at once for 30 years can become $3.3 million assuming a 12% CAGR.
As an intelligent investor, you should find a quality business that is trading much lower than its underlying value. Invest in it, and then stick to the long term.
How to pick best undervalued stocks with intact fundamentals
To find a financially sound company doesn’t require a degree in space science. With basic knowledge to solve 7th-grade maths/sums, you can easily find the best companies that have intact fundamentals and are trading much lower than their intrinsic value.
Here are the 10 parameters that will help you to pick best undervalued stocks.
Parameter #1. Debt to Equity Ratio
The D/E ratio helps an investor to gauge whether the company can deliver robust earnings by pumping external capital.
When the total outstanding debt is divided with its total assets a company has, you will find the Debt to Equity Ratio.
The debt to equity ratios signals whether the company is able to deliver robust earnings by making use of external debt. As a rule of thumb, you should start investing in those companies that are either debt-free or have a marginal debt below 0.25.
Parameter #2. Free Cash Flow
The next thing is to gauge how efficiently a company generates cash by running a business operation. Free Cash Flow is one of the widely used matrices by the analysts and brokerage houses.
Free Cash Flow gives a detailed snapshot of what cash is left in the company’s bank account to fund the dividend payments/share buyback, repay the lenders, and give interest payments to investors.
When you make a proper analysis of the FCF of a company, you will find whether the company is likely to repay the lenders on time and the chances of declaring dividends to its shareholders in the future.
Parameter #3. Earnings per Share
To check the profitability of a corporation, Earnings per Share is one of the widely used matrices. When the company’s net profit of a financial year is divided with its total common shares outstanding, you will find Earnings per share.
If you find two companies with identical EPS, then take a close look at the capital of the companies. Even if both the companies generate the same EPS, pick that company which has fewer net assets. This company has more efficiently managed its capital to generate income by running a business operation.
When a company has higher EPS in comparison to its peer companies, the chances are higher that the investors are willing to pay more to own the company’s shares. They have found that the company has delivered higher profits in comparison to its market price of a share.
Parameter #4. Dividend Rate and Dividend Yield
Have you made use of dividend yield to find undervalued stocks? I bet you haven’t.
A dividend rate is how much an investor will get in his bank account in a financial year after making an investment in a company.
The dividend yield is expressed as a percentage by dividing the dividend declared by the company for the current financial year with its’ current market price.
The dividend yield estimates how much return an investor will get by taking account of dividend only. A high dividend yield doesn’t necessarily mean that the company has delivered robust earnings. Maybe the market price of a stock is plummeting. Contrary to that, when the dividend yield is lower than its peer companies, then there is a chance that the share price has witnessed a bull run.
When the company declares a dividend year on year to cheer the shareholders, then it can be assumed that the company has robust earnings. That’s why the company has declared a dividend. Apart from that, the company’s dividend yield may exceed the peer companies, and the company may increase the dividend rate year on year. In this case, the chances are higher that the share price will surge in the long run on the wings of robust earnings.
Parameter #5. Price to Sales Ratio
The Price to Sales ratio helps an investor to find what the market is willing to pay for each dollar of sales a company generates in a financial year.
The Price to Sales ratio is calculated by dividing the company’s current market price with its total revenue generated for a financial year.
Do compare the P/S ratio of a company with its peer companies to pick the best undervalued stocks by making use of the Price to Sales Ratio.
If you find a company with a P/S ratio of 0.9, and the peer average is 2.7, then the company is deemed fit for investment. When the company is delivering a robust earnings result year on year, then the chances are higher that the share price will surge and the P/S will match the peer companies.
Parameter #6. Price to Earnings Ratio
To find whether a company is undervalued or overvalued this is a popular matrix among analysts and brokerage houses.
When you divide the current market price of a share with its earnings per share, you will get the Price to Earnings Ratio.
Simply put, the price-to-earnings ratio gives a snapshot that by paying what amount an investor can expect one dollar of the company’s earnings. For example, when a company trades at a price to earnings multiple of 10x, then it will take 10 years to recover the invested capital.
The price to earnings ratio varies from sector to sector. When a sector has a high P/E, then it can be assumed that the investors are optimistic about the robust earnings growth in the future.
Instead of conducting a witch hunt, analyze the sector, and invest in that company that has much lower P/E than its peer companies. As a good rule of thumb, pick a stock the P/E of which is trading at 10 times of its earnings.
Parameter #7. Price/Earnings to Growth Ratio
To find the undervalued stocks in the long run, analysts leverage the Price/Earnings to Growth Ratio (PEG ratio) by taking account of a company’s expected earnings growth to get a more clear picture.
The PEG ratio is calculated by dividing the Price to Earnings ratio with its projected growth rate for the next 1 and 5 year time horizon.
You can take the example of two companies namely WallStreet Inc. and StockBounty Inc. that are operating in the consumer durables sector. The price to earnings ratio of WallStreet Inc. and StockBounty Inc. is 30 and 40 respectively. If you gauge the valuation of the companies you will find Wall Street Inc. is better appealing investment option.
Now let’s include the future earnings growth to calculate the valuations.
WallStreet Inc. has a share price of $150, Current year EPS of $5, and Previous year EPS of $4.
WallStreet Inc., therefore, has a P/E of 30.0x, which is divided with its earnings growth rate of 25%, results in a PEG ratio of 1.2.
StockBounty Inc. has a share price of $120, Current year EPS of $3, and Previous year EPS of $2.
StockBounty Inc., therefore, has a P/E of 40.0x, which is divided with its earnings growth rate of 50%, results in a PEG ratio of 0.8.
Many an investor will find WallStreet Inc. the best investment options since it has a lower P/E ratio in comparison to its peer company StockBounty Inc. But when you take into account of PEG Ratio, you will find StockBounty Inc. the more lucrative option. It is available at a discount to its growth numbers.
Parameter #8. Price to Book Ratio
On dividing the company’s current share price with its book value per share, you can find the price to book ratio.
By analyzing the book value you can calculate what you will get when the company liquidates all of its assets and pays off all of its outstanding debt.
The price to book ratio may vary from sector to sector. It’s a tuff call to decide the ideal price to book ratio. Value investors often look for companies that have a book value between 1 and 2. It’s worth considering what tangible assets [land, equipment, manufacturing plants, etc.] and intangible assets [goodwill, brand recognition, patents, trademarks, and copyrights] a company has. A company with the Price to Book ratio between 1 and 3 and that has delivered robust earnings, is deemed fit for investing.
Parameter #9. Return on Equity and Return on Capital Employed
To evaluate the company’s profitability by running a business operation using the funds of the shareholders, return on equity is the useful matrics.
Simply put, the higher ROE gives a clear signal that the management of the company is efficiently utilizing the shareholders’ capital to generate profit by running a business operation.
On the contrary, Return on Capital Employed primarily measures how efficiently the management of the company runs the business to maximize profits by utilizing all the available capital.
ROCE is quite handy when you calculate the profitability of a company in capital-intensive industries namely airlines, auto, oil, steel, telecommunications, etc. ROCE takes into account of debt and other liabilities too.
Start investing in those companies that have a steady and increasing ROCE in comparison to those companies that have a volatile ROCE year over year.
Parameter #10. Current Ratio
When it is time to gauge the financial health and creditworthiness of a company, the Current Ratio is a tried and Clichy metrics to evaluate.
By dividing the current assets that a company has to its current liabilities you will find the current ratio.
Stay away from such companies that have a current ratio of less than 1. The chances are higher that the company may default on its debt obligations, when the company’s interest payable on debts significantly is higher than the profit of a financial year in case the company witnesses a deep in sales.
On the contrary, the current ratio higher than 2 signals that the management of the company is not managing the finances well in the best plausible way.
- Read also: How to Build a Stock Portfolio With Little Money
- Read also: How to Pick a Stock: Best Practices for New Investors
7 Best Undervalued Stocks to buy right now
You have searched upside down to find the best undervalued stocks to buy right now, but cannot do well.
The sole factor that decides whether you will be successful or not is that what’s your definition of undervalued stocks.
There are an ample number of investors who think that any stock trading at 7 times of sales in a financial year is undervalued. Contrary to that there is a lion’s share of investors who are willing to pay 25 times of sales generated by a company. They find the stock to be undervalued when they find that the company will deliver robust earnings in the near future.
Take the example of Tesla or Shopify where people were willing to pay 8 times of its sales generated in the financial year back in 2017. Today both the companies are trading above 20x of their sales. Still, people are willing to own the shares, because they are optimistic that both the companies have better growth prospects in the future too.
Here I will offer 7 best undervalued stocks to buy right now across different sectors that are ready to blast.
FedEx is undoubtedly a world leader that offers fast and timely delivery of packages and freight to more than 3.6 million shipments in each business day.
Let’s look at a glance of FedEx’s fundamentals.
- Market Capitalization – $64.61 Billion
- Revenue – $69.69 Billion
- Earnings Per Share – $9.19
- P/E Ratio – 26.66
- Forward P/E – 14.21
- Dividend Yield – 1.03%
- Beta – 1.31
Kroger is a retailer that is engaged in the food industry no matter who you are, how you shop, or what delicious foods you want to eat. This is not only the largest supermarket in respect of revenue but also the second-largest general retailer in the US. Kroger run its operation with 2700+ supermarkets across 35 states in the United States. The company has generated a whopping $121.2 billion in revenue for the fiscal year of 2020.
Let’s look at a glance of Kroger’s fundamentals,
- Market Capitalization – $24.21 Billion
- Revenue – $121.2 Billion
- Earnings Per Share – $3.75
- P/E Ratio – 8.48
- Forward P/E – 9.44
- Dividend Yield – 2.28%
- Beta – 0.36.
Bristol Myers Squibb
This is an American pharmaceutical company. It discovers, develops, and delivers innovative products of various series diseases namely cancer, HIV/AIDS, diabetes, hepatitis, and cardiovascular disease, etc.
This stock is not only trading at 8 times of this year’s net profit but also has delivered a whopping 3.14% dividend yield that is almost double as compared to the S&P 500 Dividend Yield.
Let’s look at a glance of Bristol Myers Squibb’s fundamentals.
- Market Capitalization – $145.90 Billion
- Revenue – $26.15 Billion
- Earnings Per Share – [– $0.11]
- P/E Ratio – N/A
- Forward P/E – 9.84
- Dividend Yield – 3.14%
- Beta – 0.67.
Tyson Foods, Inc.
Tyson food is the world’s second-largest processor and marketer of beef, chicken, and pork. Tyson, Bonici, Jimmy Dean, State Fair, Hillshire Farm, Wright, BallPark, Aidells, and Sara Lee are the well-known brands of Tyson Foods.
The company accounts not only for the production of 20% chicken, beef, and pork consumption in the US but also sells 35 million chickens a week. The company has a robust 2.78% dividend yield and has increased its dividend for the last six consecutive years.
Let’s look at a glance of Bristol Myers Squibb’s fundamentals.
- Market Capitalization – $23.55 Billion
- Revenue – $42.4 Billion
- Earnings Per Share – $5.86
- P/E Ratio – 11.02
- Forward P/E – 11.50
- Dividend Yield – 2.78%
- Beta – 0.76.
Cummins designs and manufactures state-of-the-art diesel, electric and natural gas powered engines for heavy and light vehicles. The company had a net revenue of a whopping $23.77 Billion for the fiscal year 2019. Cummins has a robust dividend yield of 2.3% and has increased its dividend payout for the last 8 years.
Let’s look at a glance of Cummins’s fundamentals.
- Market Capitalization – $34.97 Billion
- Revenue – $23.77 Billion
- Earnings Per Share – $10.60
- P/E Ratio – 22.29
- Forward P/E – 20.57
- Dividend Yield – 2.3%
- Beta – 1.09.
This company operates in the healthcare sector and offers suitable products or services to stay on track concerning fitness and health. The company generated a whopping $256 billion in revenue for the fiscal year 2019. This is the best undervalued stock you can buy right now. The company is trading at just 9 times of current year earnings especially when its dividend yield is 2.67%.
Let’s look at a glance of FarFetch’s fundamentals.
- Market Capitalization – $99.20 Billion
- Revenue – $256.6 Billion
- Earnings Per Share – $6.05
- P/E Ratio – 12.53
- Forward P/E – 10.08
- Dividend Yield – 2.67%
- Beta – 0.82.
This company deals in selling luxury fashion products through its 700 boutiques around the world. Farfetch has a robust dividend yield of 2.67% and has increased its dividend payout for the last 3 consecutive years.
Let’s look at a glance of FarFetch’s fundamentals.
- Market Capitalization – $20.38 Billion
- Earnings Per Share – [– $3.45]
- P/E Ratio – N/A
- Forward P/E – [– 38.44]
- Dividend Yield – 2.67%
- Beta – 3.53.
Hope this article will help you to find best undervalued stocks to buy right now. Have I missed any undervalued stocks that are available at an attractive valuation? Let me know so that I can add it too.