Best way is to make money from stocks that are undervalued.
But I can tell you a trick that has been working for me, for past many years, to really make some good money by investing in stocks that are undervalued. So, you may ask what are undervalued stocks? This can be understood by an example. Sometimes it happens that certain unpopular companies have been growing in sales and profits quarter by quarter (there are 4 quarters of 3 months each in a year) but their stock price still didn’t go up.
Actually, many unpopular companies go unnoticed (by traders and investors alike) to trade or invest in them and so these companies’ stocks are still available at cheaper prices in spite of being showing good growth in their sales and profits. The general rule of thumb is the stock price should rise as the profit of the company rises QOQ (quarter on quarter). If it’s not happening then the stock is undervalued.
Suppose the company has grown in profit by 20% in last 2 quarters while the stock price has not risen at all or might have risen only 1-10% then it is still an undervalued stock. I have noticed, almost 80-90% of the time, that stock price of such undervalued stocks ultimately, over time, catch up with the profit and sales growth of the company. So, if you have bought at the time when the stock was undervalued then it could be nothing better than that as surely it will make you a good profit when the stock price will catch up with the profit and sales growth of the company as the market participants will eventually buy and increase the price over time.
If somehow undervalued stocks can be made to bring to the attention of media or larger investors, it will catch the fire sooner than later to give an immediate rise in price. This trick really works to make some good money from the stock market investing. The only thing you have to do is to recognize these undervalued stocks before everyone else do it.
You may ask how often it is so that the stock price of many such stocks remain undervalued and why such stocks sometimes don’t get the attention of the investors? To let you know there are actually 4000-5000 stock-listed companies in India and all these companies declare their quarterly results (profit and sales the company generated during a given quarter) within just 1 and the half month just after the end of a particular quarter. For example, March quarter (Jan-Mar) results are declared within a time period of 10th April to 15th May. You can always check this page on moneycontrol.com to know which company is going to declare it’s results on which date. It’s better to check this page at the end of a particular quarter.
Results are first declared (in the form of a PDF File) on bseindia.com for all BSE listed Indian companies. You can check it on the home page of bseindia.com under "Corporate Announcements". During this period you will see a lot of fluctuations in the stock price of popular companies as per the good or bad results declared by the company.
Since so many companies declare their quarterly results in a short period of time it’s hard for everyone to check results of each and every company and also not everyone has money to invest in all stocks that declared good results. Just imagine, if we consider 5000 active stock-listed companies in India, 20,000 times (5000 * 4) the quarterly results are declared for the whole year and so naturally good results of many unpopular companies will go unnoticed.
If you have that required patience to hold-on with the undervalued stocks, I guarantee no one can stop you making money. The stock price often comes down again if it has risen after a good set of numbers in quarterly results as many short-term traders book profits. That is the time you should buy for long-term.
But you should know the method to check whether a stock is undervalued or not. This is quite easy to do. On sites like sharemarkethow.com, you can also check the PE a stock is trading at, as PE can determine if a stock is undervalued or overvalued. For example, just click here to check all data (including PE) of a company called “Coral Laboratories”. Just check our stock scanner to find all stocks that are undervalued in the Indian stock market.
So, what is PE and how it can determine if a stock is undervalued or not? PE means Price To Earnings. It shows how many times a stock is trading of its yearly EPS. What is EPS? It is earning per share of a company. Just divide the yearly net profit made by the company with the total number of shares issued by the company and that will give the earning per share. Suppose the yearly EPS of a company is 4 and it is trading at a price of Rs.20 on stock exchanges then it means it is trading 5 times of its yearly EPS of 4 (5*4=20). So it’s PE is 5.
A stock is usually considered undervalued if PE is less than 10. But it’s good to compare PE with industry PE to better know if a stock is undervalued or not. Industry PE is the average PE of companies doing similar business as the company for which we want to know if it is undervalued or not. You can also find industry PE among the data given for a company on our site (make use of the search box above to find data for any stock listed company in India). If PE is too less than the industry PE it’s time to buy that stock immediately. So this how you can make money by investing in undervalued stocks.
Written By: Rajesh Bihani, Senior writer at sharemarkethow.com.