At a recent trading conference, there were presentations about finding undervalued stocks to trade, a very well know topic.
This is fundamental analysis to find stocks with potential for growth in the medium to long term future.
So what are the ways to find these stocks which are undervalued?
Many traders have written about thee factors:
1. Profit levels over the years
2. Equity levels
3. Debt levels
4. Return on equity (ROE)
5. PE ratios (price to earnings ratio)
6. Fundamentals: is it a business that is and will be in demand, are the directors previously successful and have a good reputation?
There are formulas you can use to calculate the potential value of the stock (intrinsic value) and to compare this with the current price of the share or stock, to see if there’s a difference, also known as the Warren Buffet way.
It can be surprising that many “popular” stocks or shares have low ROE, falling profit levels, increasing debt, etc but because they are well known names people are investing in them, even with no clear rises in stock price.
The fundamental way to invest is to look for stocks which match criteria for solid, high potential, and undervalued companies and to look for suitable entries on these.
A suitable entry may be determined by technical analysis to find troughs to enter. Sometimes the trough may be quite severe as in the recent Japan crisis causing stocks to drop sharply before the rebound back up.
Many traders use these as opportunities to get into stocks and CFDs that are fundamentally sound and have some sort of reason to be resilient and rise up again soon after crises such as these.
Some choose to read company reports and research the directors, the businesses, how debts are defined and reported (so can tell if good or bad debt), and others choose to follow recommendations by experienced investors who offer such a service and who can show an accurate and successful trade record even through periods in the market which are not boom times.
But it is another arrow in the bow so to speak when it comes to investing, in that you are using long term strategies of fundamental analysis as well as technical.
Each method of trading (ie between fundamental and technical) is affected by the short term market is volatile and is based on fear, greed, and panic, including world events. Even in the long term, conditions may change, industries may go into or out of favor, and other crises could occur.