Whether you are a Retail Investor or an Institutional Investor, everyone is trying to find “THE NEXT BIG STOCK” to invest in, so they can multiply their wealth. But to grow your investment multifold, you need to find those Undervalued Stocks before it comes into the radar of the market. There are many ways to find an Undervalued Stock, but today we are going to talk about the 3 Easy Ways to Find Undervalued Stocks.
But before we begin we must say, these methods will help you in finding the initial list of stocks upon which you will do your research or take help from a professional advisor. These methods don’t cut off the part where you do your due diligence before investing in any stock. If you do not know how to analyse a company before investing then read this article talking about the basics of company analysis.
- How to Find Undervalued Stocks?
How to Find Undervalued Stocks?
1. Mutual Fund’s Portfolio
Most of the Actively Managed Mutual Funds will publicly mention only the name of the Fund Manager/s managing the fund. But, when it comes to deciding whether to add a stock or to reduce it, the Fund manager is not the only person who is responsible for making that decision.
A Fund House or an AMC employs multiple people starting from Stock Analysts to Sector Analysts to Economic Experts to Investment Advisors to Risk Analysts. And in the modern era, some Fund House might even be taking the help of an – AI or Artificial Intelligence.
So you see, Buy or SELL decisions of stocks in a Mutual Fund don’t come from a single person. It is a collective decision of multiple brains which excel in their field. So a Mutual Fund has a very high probability of finding those Undervalued Stocks before the retail market notices it.
Which Fund to Look For When Picking Undervalued Stocks?
All you need to do is to keep your eyes on the portfolio of the Mutual Funds you like.
If you want to find stocks that are in the Midcap space, then follow the Top 5 Midcap Funds. If you want to invest in stable companies with long market history and your risk appetite is low, and you want to avoid High Risk – High Growth companies then follow the portfolio of the Top 5 Large Cap Funds. If you want to stay in between, then the portfolio of Large and Midcap Funds might help you.
We try to avoid both Smallcap Stocks and Smallcap Mutual Funds as they carry a Very High Risk along with them. But your Risk Appetite might be different, and Smallcap Stocks and Mutual Funds might suit your investment style.
But, again a reminder –
What are the Changes to Looks For in a Mutual Fund’s Portfolio?
- Top 10 Holdings – For most Retail Investors, the Top 10 Holdings will be a good place to start from. Mutual Funds manage large sums of money, and the Top 10 Holdings get the most amount (not always but fairly often). Same stock in the Top 10 Holdings of multiple funds could show the confidence fund houses have in that stock. Most of the time, these stocks will carry Low Risk compared to Bottom 10 Holdings.
- Recent Addition To The Portfolio – Mutual Funds need to publicly report their portfolio every month by law. So if you are following a fund’s portfolio for a few months, and you see a new name in the Total Holdings List then it will be wise to check that company out. And if you find the company attractive according to your analysis, then you might add the stock to your portfolio.
A Major portion of the AUM of the Mutual Fund invested in the newly added stock might act as another positive sign.
- Substantial Change in Weightage on an MoM Basis – If you see a sudden jump in the weightage of a stock on a Month on Month basis then it might be a good idea to take a deeper look at the stock and the company. There might be a reason the Fund House is adding more shares of that company to their portfolio, and you need to find that reason. If the reason satisfies your investment style, then you might add that stock to your portfolio.
More than a 5% – 6% jump on an MoM basis is a good place to start from.
We might add, most of the time this kind of movement in the weightage of stocks in a Mutual Fund’s Portfolio might be motivated by a Short Term Goal in mind. Undervalued Stocks found using this method might not always suit a Long Term Investor.
For the in-depth research on Mutual Funds, we suggest you use either the Mutual Fund section of Moneycontrol or Morningstar India. Or you can use any website of your choice which shows the complete holding of a Mutual Fund and the changes in the holding of the fund.
We have talked about in brief and showed you how to use Stock Screeners in our how to double your money article.
Stock Screeners does what its name suggests, it screens stocks based on the user-defined conditions.
So what are the conditions needed for the screener to screen for Undervalued Stocks?
We would start with the easy one first.
“Screener.in”, known in the Indian Stock Market as Screener, specializes in what its name suggests, Screening Stocks.
First, you need to click on the Login button to login into your profile. Or if you do not have a profile, click on the Register button to create one.
After you have logged into your profile, click on the Screens button present on the top menu bar.
Now you will be presented with a list of Ready-Made screens which are made by the Developers of the website or by the common users. Each Screen has a description, describing what type of companies it screens and based on what parameters.
You can even make your own Screens by clicking on the New Stock Screen button. But to make your own screen, you need to follow these guidelines before making one.
As we are trying to find Undervalued Stocks, a good place to start will be the “Undervalued Growth Stocks” screen. If you cannot find it in the list of screens, then use the search option on the “Screens” page to find it.
Now click on the name to see the list of stocks the screener screened under the conditions specified.
When you click on the name, you will be presented with the set of conditions the screener is screening for. And then the list of stock that passed the conditions specified.
Stocks listed under this screen are a good place to start for beginners or you can find many other screens which have a different set of conditions.
You can even change the conditions of the screens by scrolling down to “Search Query”. But we suggest you not change the conditions if you do not understand what each condition does. Change the conditions of the screens only if you understand what you are doing.
In Simply Wall Street, you can screen Undervalued Stocks in two ways.
But to use Simply Wall Street, you need to log in to your profile. If you do not have a profile, then you need to create one.
The “Discover” option which is present on the Top Menu bar after you have logged in, is the easiest way to start for a beginner. These individual screeners screens stocks on a pre-defined set of conditions. Just like the Ready-Made screens, we saw on “screener.in”.
By reading the Name and the Description of the screens, you would be able to understand what kind of stock each screener is screening for.
If you are a beginner, then we suggest these 4 screens would be a good starting point for you, if you are trying to find Undervalued Stocks.
- Buy the Dip
- Potentially Undervalued
- Growth at a Reasonable Price
- Established, Profitable and Undervalued
How to use Simply Wall Street Screener?
You can also use the Screener present in Simply Wall Street to screen for Undervalued Stocks. To use the Screener in Simply Wall Street, just click on the Screener option from the Top Menu Bar.
After you have landed on the Screener page. Click on the “Add” button on the “FILTER BY MARKET” section, and search for “India” or “NSEI”. Because we only want to screen stocks traded in the Indian Stock Market.
We do not want to filter our stocks based on Sector or Industry, so we will leave the “FILTER BY INDUSTRY” section as it is.
Now in the “ADVANCE FILTERS” section, to find Undervalued Stocks, we would use –
- Market Cap
- PEG Ratio
- 3 Year Earnings Growth Estimate (Optional)
- Past 5 Year Earnings Growth
- ROE Ratio
- Debt to Equity Ratio
Market Cap Distinction in India
- Small-Cap Stocks – Up to Rs. 5,000 Crores.
- Mid Cap Stocks – From Rs. 5,000 Crores to Rs. 20,000 Crores.
- Large Cap Stocks – Rs. 20,000 Crores Onwards.
Simply Wall Street uses USD in calculations so you need to convert INR to USD before entering the Market Cap limit.
For example –
If you want to search only in the Mid Cap segment and assuming 1 USD = 70 INR, then you need to set your Market Cap Lower Limit to –
Rs. 50,00,00,00,000/- ÷ 70 = $71,42,85,714.286 or 714 Million USD.
So, we will set the lower limit to 700 Million.
And the Upper Limit will be –
Rs. 2,00,00,00,00,000/- ÷ 70 = $2,85,71,42,857.14 or 2,857 Million USD
Or, we can round it up to 3,000 Million USD.
So, set your Market Cap Limits according to the segment you want to search for.
Now the valuation part. Simply Wall Street has an amazing inbuilt Discounted Cash Flow calculator. In this article, we discussed how we used the DCF Calculator of Simply Wall Street to evaluate stocks.
As we want to find Undervalued Stocks, in the “Value” section, set the Lower Limit to Positive (+VE) 20% and drag the Upper Limit point all the way. If you want stocks that are less than 20% undervalued to the CMP or the Current Market Price in your list, then you might set the Lower Limit to ZERO %.
Now in the PEG Ratio section, you need to set the limit to 1. We will have a detailed discussion on PEG Ratio, later in this article.
If you are using the “3 Year Earnings Growth Estimate” filter, then set the Upper Limit to infinity and we want a minimum of 10 – 12% Growth each year so, set the Lower Limit to either 10% or 12%.
In the “Past 5 Year Earnings Growth” section, again – Upper Limit to infinity and Lower Limit to at least 10% (15% would be ideal).
In the “ROE Ratio” section, drag the Upper Limit to infinity and the Lower Limit to 20%.
And we do not want a company that has more than a 50% Debt to Equity Ratio. So, in the “Debt To Equity Ratio” section, set the Upper Limit to 50% (40% – 45% of the Debt to Equity Ratio will be ideal).
Now click on “Done”. And you will be presented with a small list of stocks, which you can further analyze.
Ticker Tape also has an easy-to-use screener on the website. To visit the screener, you need to click on the Ticker Tape logo located on the Top-Left corner of the screen and select “Screener”.
As said earlier, the screener on Ticker Tape is pretty easy to use. At first, you are presented with the basic filters like Stock Universe, Sector, Market Cap, Close Price and Price to Earnings Ratio. Later you can add more filters by clicking on the “Add Filter” button.
How to use Ticker Tape Screener?
We are now going to see how you can utilize the screener in Ticker Tape to screen for Undervalued Stocks.
We are not going to use the “Stock Universe” filter at the beginning, we will use it later. First, we start with Market Cap.
As discussed earlier, investing in Smallcap Stocks or Smallcap Funds is a risky business, so we are going to avoid Smallcap and go with Midcap or Largecap. Risk-Averse investors might use the Largecap option only. But if you have the risk-taking capacity of investing in smallcap then you should invest in Smallcap Stocks or Funds.
If you hover your mouse over the name of the Filter you can even remove each filter. For this example, we are going to remove the Closing Price filter and the PE Ratio filter.
*Reason – Well, filtering stocks on the closing price basis is just useless. And we are going to use a better ratio known as PEG Ratio, which is PE Ratio divided by EPS Growth Rate. PEG Ratio is a bit more accurate and draws a clearer picture than just PE Ratio. But as PEG Ratio is not present in Ticker Tape, we are going to clear our workspace by removing PE Ratio.
**Info on PEG Ratio – If you want to take the help of PEG Ratio while evaluating a stock, use the website ‘screener.in’ mentioned above. If you are logged in on Screener, then go to the stock of your choice and in the “Add Ratio” field, type “peg”, and the option of PEG Ratio should come up. Click on the name of the ratio to add it to your list of ratios, and it should show you the PEG Ratio of that particular stock.
If a stock has a PEG Ratio of 0.99 or below, then the stock price is considered undervalued at the moment. If any stock has a PEG Ratio of 1 or more, then stop investigating that stock further and save your time if you are out in the market for Undervalued Stocks.
Now click on the “Add Filter” button, and from the Profitability section, add (1) Return on Equity.
From the same Profitability section, add (2) Return on Equity (3) Net Profit Margin (4) Return on Investment. If you want more precision, then use the 5 Years Average of these filters along with them.
Now from the Financial Ratios section, add (1) Debt of Equity Ratio (2) Interest Coverage Ratio (3) Current Ratio.
Now set everything to “High” other than Debt to Equity Ratio. On the Debt to Equity Ratio filter, first set it on “High” then change the lower limit to 50.00.
This should trim the list down to a handful of stocks. But if you think you have too many to handle then use the “Stock Universe” filter to trim the list down more. We suggest you only use the “Nifty 50”, “Nifty Midcap 100” and “Nifty 100” for the best result.
All the methods discussed above should only be used to shortlist potential stocks. The final result of these screeners should always be further analyzed.
The list of stocks yielded by these screeners is not the final list in which you should invest. These lists of stocks shortlisted by these screeners should be further filtered using Fundamental Analysis, Qualitative Analysis and more.
3. Broker’s Research Report
We know we have made you read a lot in this article, and you are ready to go and implement those methods to find Undervalued Stocks. We will not make you wait for more, so here is a quick read on how you can use Broker’s Research Reports to find Undervalued Stocks.
Full-service brokers like Sharekhan or ICICI Direct charge a bit more on brokerage compared to a discount broker like Upstox. But they provide their customer with Stock Research Reports and Investment Advice on a Weekly and Monthly basis. If you are using any full-service broker, then using their Research Reports, you can shortlist potentially undervalued stocks.
Most of the time, Research Reports will mention the reason why the broking house is recommending a particular stock. If you find a stock with a satisfying reason for the recommendation, then further investigate the company with fundamental and qualitative analysis.
There are multiple ways to shortlist stocks but the 3 ways discussed above to find Undervalued Stocks are the easiest of all and are beginner-friendly. So you can use these methods to find the initial list of stocks.
These methods should be utilized only if you do not have any list of undervalued stocks at the moment or if you have too big of a list that you want to shorten.
The methods discussed above will yield the very initial and crude list of stocks. You should always analyze the fundamentals of each stock separately before investing. If you do not know how to analyze stocks, then we would ask you to take professional help from a certified financial advisor.
Hope the methods discussed above were helpful. If you have any questions or queries regarding this topic, do let us know in the comment section and we will try to answer them.
Disclaimer: The views, investment tips, presumptions, and calculations expressed on Moneypremier.net are not of the website or its management. This article is for Educational Purposes only. Moneypremier.net advises users to check with certified experts before making any financial decisions.