How to identify undervalued stocks quickly and easily?
When buying company shares, you should focus not only on their popularity rating and how much dividends you can expect to receive in the future.
A more important indicator is the valuation of a security, how high the market price of a share is in relation to its real value.
Based on this, the stock may be undervalued – with high growth prospects, or overvalued – with a high risk of price decline.
Investing in undervalued stocks is profitable because it provides an opportunity to purchase securities at a price below their actual value and thereby generate additional profit.
However, you shouldn't completely trust analysts' recommendations—their assessments may be delayed or incorrect.
Therefore, it is useful to learn how to independently check which stocks are truly undervalued, especially since it is not as difficult as it seems.
A simple method for evaluating shares
There are four key metrics used to identify undervalued stocks. Let's examine them in detail, using examples.
| Indicator | What does it show? | How to count | What to look out for |
|---|---|---|---|
| P/E (Price/Earnings) |
How much do investors pay for $1 of company profit? | Share Price ÷ EPS | The lower the P/E, the better the stock. Compare to the industry average |
| P/B (Price/Book Value) |
Compares the price of a stock to its book value | Share Price ÷ (Equity ÷ Number of Shares) | A P/B below 1.5 indicates potential undervaluation |
| EPS (Earnings per share) |
How much net profit is there per share? | Net profit ÷ number of shares outstanding | The higher and more stable the EPS growth, the better |
| FCF (Free Cash Flow) |
The money a company has left over after expenses and investments | Operating Cash Flow – Capital Expenditures | Steady growth and a positive indicator are a good sign |
- Price/Earnings (P/E) is the ratio of the market price to the earnings for the previous year
P/E = Share Price / Earnings Per Share (EPS). The lower this ratio, the better the buy.
Example: Alphabet (Google):
Share price: $157.04; EPS: $6.46
Calculation: 157.04 / 6.46 ≈ 24.3
If the average P/E ratio in an industry is higher (for example, 30), the stock may be undervalued.
- Price/Book Value (P/B)
P/B = Share Price / Book Value per Share. If the ratio is less than 1.5, the stock is potentially attractive.
Example: Berkshire Hathaway Company:
Share price: $537.72; Book value per share: $384.09
Calculation: 537.72 / 384.09 ≈ 1.4
The stock appears undervalued (P/B < 1.5).
- Free Cash Flow (FCF)
This indicator shows how much free cash a company has left after expenses and investments. Steady growth in this indicator indicates the company's financial stability.
Example: Apple has FCF:
- in 2024: 85 billion USD
- in 2025: 92 billion USD
FCF growth indicates the financial health of a company.
- Comparison with similar companies
Compare a company's financial performance with its competitors. If the stock price is significantly lower despite similar profit and growth figures, the stock may be undervalued.
Example: Delta Air Lines has a P/E ratio of about 7.9, while the industry average is about 15. This means that Delta stock is potentially an interesting investment.
You can find the data needed for calculations both on company websites and on resources such as:
- Yahoo Finance (finance.yahoo.com)
- Google Finance (google.com/finance)
Let's try to analyze the 10 most liquid stocks on the stock market:
| Company | Ticker | Share price (USD) | P/E | P/B | Grade |
|---|---|---|---|---|---|
| Apple Inc. | Aapl | 223,89 | 28,5 | 34,9 | Overrated |
| Microsoft Corp. | MSFT | 382,14 | 35,2 | 15,1 | Overrated |
| Amazon.com Inc. | AMZN | 196,01 | 58,7 | 8,9 | Overrated |
| Alphabet Inc. | GOOGL | 157,04 | 24,3 | 5,4 | Normal price |
| Berkshire Hathaway | BRK.B | 537,72 | 8,5 | 1,4 | Underrated |
| Johnson & Johnson | JNJ | 155,36 | 17,8 | 5,7 | Normal price |
| Tesla Inc. | TSLA | 282,76 | 72,3 | 14,2 | Overrated |
| JPMorgan Chase & Co. | JPM | 162,45 | 10,3 | 1,2 | Underrated |
| Visa Inc. | V | 346,33 | 32,6 | 14,8 | Overrated |
| Walmart Inc. | WMT | 89,76 | 23,4 | 4,9 | Normal price |
As you can see, not all popular stocks are attractive to buy, especially since many of them don't pay dividends. This means profits can only be made if the price rises, which is unlikely due to overvaluation.
When assessing the undervaluation of a stock, it is important to analyze not only the financial indicators, but also the prospects of the industry in which the company operates.
Factors such as technology trends, changes in consumer preferences, and regulatory initiatives can significantly impact future profitability.
In addition, assessing a company's competitive advantages and management quality will help understand its potential for growth and sustainability in the market.
As for my personal preferences, I also try to buy stocks that are as far away from their price peaks as possible. This means they have the potential to regain their peak value.
Thus, a comprehensive approach that includes analysis of financial ratios, industry prospects, and internal company factors will allow you to more accurately identify undervalued stocks and make informed investment decisions.
