Causes of Undervalued Stocks You Should Know,,

Causes of Undervalued Stocks You Should Know.

Causes of Undervalued Stocks You Should Know

Stocks are one of the most popular investment instruments today. Usually, novice investors will look for undervalued stocks to buy because they are more profitable. However, to determine whether the stock is undervalued or not, a long analysis is needed. Fundamental analysis is one way to find undervalued stocks.

Understanding Undervalued Stocks

In the investment world, undervalue means a sale of a security or an investment product at a price lower than its intrinsic price. Which intrinsic value or price can be made by a company based on cash flow. So it can be concluded that if the goods are undervalued, it means that the goods sold are lower than the market price.

While undervalued shares are defined as shares that have a selling price that is much lower or cheaper than the normal price. For example, company A which is engaged in the culinary sector issues shares that are sold for Rp. 700 per share.

Whereas the share price of culinary companies in the capital market is sold at Rp. 1,000. So that company A had an undervalued stock because its share price was lower than the normal price on the stock market.

Undervalue Stock Criteria

Determining a stock is included in the undervalued category or not is easy. But you can see from the stock criteria, the criteria for undervalued stocks are:

 1. Generate Consecutive Profits for 10 Years

Companies that have undervalued shares do not mean that they do not generate profits at all. However, the company continued to make profits for 10 years in a row, either by the same or greater amounts and with no recorded losses. Usually, companies with undervalued shares are generous to their investors in the distribution of dividends.

2. Financial Condition With 2:1. Ratio

The second criterion for companies with undervalued shares is to have a strong financial condition with a ratio of at least 2:1 and long-term debt not greater than the company's net current assets.

In addition, the company must also be able to sell shares of at least 1 trillion rupiahs in one year to manufacturing companies. Meanwhile, service companies must be able to sell at least 500 billion in 1 year. Or you can also look at the LQ45 index to determine whether stocks are undervalued or not.

Causes of Undervalue Shares

Undervalued shares are caused by the following things.

1. Market Interest In A Good

Usually, the company's shares will be undervalued if the goods sold by the company do not have a lot of interest. For example, company A, which is engaged in cosmetics, experiences a decrease in its stock price because many people choose other cosmetic products.

So that the cosmetics of company A rarely sell in the market or even do not sell at all. That way, investors will think twice about buying company A's shares. Therefore, company A's stock price will be cheaper to sell in the stock market.

2. Global Economic Conditions

The next cause of undervalued stocks is global economic conditions. For example, when a country is experiencing a monetary crisis, the shares of companies from that country are not widely seen by investors.

As a result, the stock price is low because it is rarely interesting. Indonesia itself has experienced several global crises that affected the movement of the JCI or the Composite Stock Price Index.

3. Internal Company

Undervalued shares can not only be caused by external factors but can also be caused by the internal conditions of a company. The company's internal conditions are like when the company is experiencing a loss.

Which later became one of the reasons the company was late in distributing dividends to investors. If this continues in the long term, it is possible for investors who hold shares of the company to sell their shares at a low price.

How to Find Out Undervalue Stocks

In addition to knowing the criteria for undervalued stocks, you can also use methods to determine undervalued stocks such as PER (Price Earnings Ratio) and PBV (Price-to-Book Value). PER (Price Earnings Ratio) is a comparison between the company's net income and the company's stock price.

Meanwhile, PBV (Price-to-Book Value) is a ratio that serves as a comparison between the value of a stock in the stock market and the book value per share. When a stock has a higher PER and PBV, the stock is expensive.

However, if the PER and PBV values ​​are lower then the stock is considered cheaper or prospective. The high or low rating of an understanding with PER and PBV depends on the sub-sector. Which is not all types of stocks are suitable to be valued using this method.

How to Choose Undervalued Stocks

After knowing how to find undervalued stocks, then next you have to know how to choose undervalued stocks such as:

1. Define the Stock Sub-Sector

The first step is to determine the sub-sector of the stock that you will buy. You can also consider buying undervalued stocks with good growth opportunities in today's economy.

2. Data Research

After determining the stock sub-sector to be purchased, the next step is to collect stock data about price movements in all issuers in the stock sub-sector.

3. Compare PER and PBV

The final step is to compare the PER and PBV of the stock. You can use the data that has been collected and then determine which stocks are undervalued.

If you are more interested in the crypto world than stocks then you can try to download the Pintu application. This application provides complete information about *crypto * and you can also learn to invest with Pintu.

Reference:

Investopedia, What Is Undervalued?. Accessed date: 01-12-2021.

Wikipedia, Undervalued Stock. Accessed date: 01-12-2021.

Vishnu, Undervalued. Accessed date: 01-12-2021.