How To Find Undervalued Stocks – Cheap Stocks

Investing in undervalued stocks has been the key to success for many winning investors. These hidden gems are never standing out in the crowd announcing that they are cheap. We use 4 key data points to help us filter through the mess and find potentially undervalued stocks.

Price to Book

Book value is a company’s total assets less it’s total liability’s. It is shown as a per share value. A book value ratio is relative to the share price. A stock that has a book value of 5 might be undervalued if it was trading at $1 per share, but not if it was trading at $10 per share. We use the Price to Book ratio which takes the share price into account. The Price to Book number is the stock price divided by the book value per share. The lower the better.

P/E Ratio

The P/E ratio represents the stock price to the company’s earnings. In general a low P/E ratio can be a sign that a stock is undervalued. The market average has traditionally been 15. Because P/E ratio’s vary depending on industry we don’t put a lot of weight on this ratio when calculating the value rating. It should be strongly considered when evaluating stocks in the same industry.

Current Ratio

Current ratio is simply the current assets divided by current liabilities. The higher this ratio is the better.

5 Year Net Income Growth Rate

Net income is pretty easy to understand. We want to invest in companies that have positive net income and are growing their income each year.

Using these data points we created a Top 100 undervalued stock list. The value rating is based on a 100 point scale.