How To Find Cheap Stocks
We all love discounts. However, the stock market store offers discounts during the most unexpected moments. So, how do you find cheap stocks?
Baron Rothschild once said: “Buy when there's blood in the streets, even if the blood is your own.“ He should know.
Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But those were different times.
In the 21st century information travels fast. You need to be smarter and consider all the possible strategies you can find. Here is one I often use.
Step 1: Define Your Criteria
Start by defining the criteria you'll use to identify undervalued stocks. This could include metrics like the Price-to-Earnings (P/E) ratio, Price-to-Book (P/B) ratio, Dividend Yield, and Earnings Growth Rate.
Step 2: Choose a Stock Screener
Select a stock screener tool to help you filter and sort stocks based on your chosen criteria. Some popular stock screeners include:
- Finviz: Offers a wide range of fundamental criteria to screen stocks.
- Yahoo Finance: Provides a user-friendly interface to screen stocks based on various financial metrics.
- StockFetcher: Allows you to create custom screens using fundamental indicators. A bit harder to use but very powerful.
Here are some more tools to help you out.
Step 3: Set Screening Parameters
Set the parameters for each metric you've chosen to identify undervalued stocks. For example:
- Low P/E Ratio: Look for companies with P/E ratios below the industry average or historical norms.
- Low P/B Ratio: Identify stocks with P/B ratios significantly below 1, indicating potential undervaluation.
- High Dividend Yield: Search for companies with dividend yields that are unusually high compared to their historical average or peers.
Step 4: Review Qualitative Factors
Instead of technical indicators, focus on qualitative factors that could suggest undervaluation:
- Market Sentiment: Look for companies that have recently experienced negative sentiment or poor market performance, as this could lead to undervaluation.
- Recent Negative News: Investigate companies that have faced negative news or events that might have led to a drop in stock price.
Step 5: Validate with News and Research
Perform additional research to validate your findings:
- Check Recent News: Look for stocks that have recently faced negative news or events. Sometimes, short-term negative news can create buying opportunities if the underlying fundamentals are strong.
- Company Financials: Review the company's financial statements, recent earnings reports, and growth prospects to ensure the potential undervaluation isn't due to deteriorating fundamentals.
Step 6: Deep Dive into the Most Promising Company
Once you've identified a list of potentially undervalued stocks, focus on a thorough analysis of the most promising ones:
- Fundamental Analysis: Dig deeper into the company's financials, understanding its revenue, profit margins, debt levels, and growth prospects.
- Competitive Position: Assess the company's position within its industry, its competitive advantages, and any barriers to entry.
- Management Quality: Research the company's leadership and management team to ensure they have a track record of sound decision-making.
- Industry Trends: Understand the trends and challenges in the industry the company operates in, as these can impact its prospects.
That being said, don’t be afraid to skip a stock if something seems off and you can’t find out why.
Capital preservation comes first.
Capital growth comes second.
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