Finding a stock with good potential value at an affordable share price appears to be an unnerving task. In this article, we’ll discuss how to find affordable stocks that give you more profits. Most seasoned stock investors look for a pretty cheap stock that will rise in value in the future.
However, this does not imply that you should start looking for cheap stocks every time. What seasoned investors mean by “cheap” doesn’t mean “low in price” but precisely “undervalued.” An undervalued company would have a lower price whose actual, higher potential value hasn’t been reflected in the market yet. It might sell for $100 right now, but its worth would be $200, based on predictable future cash flows. These stocks not only have lower share prices but also give you good value for the money invested.
Screen them out
Now that you know what undervalued stocks are, spotting them becomes straightforward. The quick and effective way to find affordable stocks is by searching on a stock screener using criteria that suit your needs. Most online stockbrokers have a stock screener with the tools to filter using any possible criteria you can imagine. You can also set the annual sales growth to be above a specified level. Growth rates and value are relatively basic; they are found in most screeners. Advanced screeners will offer more measures and customization. You can choose the best screener that suits your needs.
Once you’ve finalized your screener, you could set a target for future earnings growth rate. It is necessary to search for a good company. “Good” can be defined in numerous ways, but a quintessential trait is fast growth. Quick-growing companies are always held in high regard by investors.
The next step when finding affordable stocks is to set up a screen for a company’s future earnings growth rate. Some screeners may not have a screen for future earnings growth. In that case, you can use a screen for sales growth. In some cases, the screener may not have both; under those circumstances, look for earnings or sales growth from the past five years instead.
Once you’ve finalized a list of fast-growing companies, you must add another criterion to the screener — search for inexpensive companies. We must not forget that we are talking about undervalued stocks here, not stocks with just a low share price. You would find plenty of stocks that offer a low share price, but they might not be undervalued stocks.
How to find undervalued stocks?
Most investors do a simple calculation: divide the current price of one of its shares by its annual earnings per share.
The result is called the price-earnings ratio or P/E ratio. If the company has a low P/E, the company is cheap. Now you must add this criterion to the screener.
At this stage, the screener should load several companies that fall in these categories:
- Comparatively cheap.
- Analysts assure that these companies will grow earnings well in the future.
If you see more companies than you need, you could set the minimum size of the company measured by its market capitalization. Almost always, the smaller the market capitalization, the riskier it is. And large capitalizations have value at over $10 billion.
For some, the list may still be too long
If that’s your case, consider adding more criteria like:
- Try increasing the minimum growth rate.
- Choose companies that pay dividends; it is a sign of robust financial health.
From here you have to analyze the stock and narrow down good stocks at a bargain.
- If this is a high-growth stock, why is it cheap?
- What does this company do? Does this industry have a promising future?
- What’s the management style? Is it aligned with shareholders?
- How are the company’s balance sheet and other financials?
Finding answers to these fundamental questions is once again a huge task, especially if you’re aiming to have a well-diversified portfolio. And it does not end here. Once you’ve purchased your affordable stocks, you must start analyzing the quarterly earnings reports.
There is more
You must be aware that searching is only the first step. Investing in individual stocks takes loads of time. It is necessary to do the following: understand the various types of stocks; read about the company and its management; study the industry; evaluate the financials (including balance sheet and income statement), and closely monitor the company’s quarterly reports.
If you are new to stock investing, you should understand that the above steps are not simple. They would take away most of your evenings and weekends. And investors who make good profits do more than what is mentioned above, after finding a stock.
Nevertheless, if you’ve decided to invest in stocks, make sure to open an account with a broker that provides good screening and research. Some firms also offer professional analysts who can help you get started. Well, if this seems like a hobby you wouldn’t enjoy, you can consider buying an index fund instead.