Use These 3 Metrics to Find Undervalued Stocks | Smart Change: Personal Finance | – The Montana Standard

Being able to find and invest in undervalued stocks is a great ability to have as an investor. Great companies can often fly under the radar or be underpriced by the market, and being able to identify those can pay off big with returns — just ask Warren Buffett, who’s made a fortune finding undervalued companies. If you’re looking to find undervalued companies, using these three metrics will help you.

1. Price-to-earnings (P/E) ratio

There aren’t too many metrics more commonly used to determine whether a stock is undervalued or overvalued than the P/E ratio. The P/E ratio lets you know how much you’re paying per share for $1 in earnings. To find the P/E ratio, simply divide a company’s share price by its annualized earnings per share (EPS), which is its net income divided by outstanding shares.

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If a company has $100 million in annual net income with 50 million outstanding shares, its EPS would be $2. If its share price is $50, its P/E ratio would be 25. This essentially means you’re paying $25 per $1 per year in earnings.

To really get an idea of whether a stock is undervalued, you need to compare it to similar companies in its industry. For example, you wouldn’t compare Nike with ExxonMobil, or Sweetgreen with Amazon. If several companies in the same industry have a P/E ratio within a close range of each other and you find a company with one drastically lower, that could signal it’s undervalued — and vice versa.

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2. Price/earnings-to-growth (PEG) ratio

The PEG ratio is similar to the P/E ratio, except it takes into account a company’s future earnings growth. To calculate the PEG ratio, you must first know the P/E ratio. Once you have the P/E ratio, you divide it by the company’s earnings growth rate (EGR) over a specific time to get its PEG ratio.

For example, if a company has a 20 P/E ratio with an EGR of 10%, its PEG would be 2. A PEG ratio less than 1 can mean a stock is undervalued, while a ratio above 1 can mean it’s overvalued. A company with a PEG ratio of 1 has a perfect relationship between its market value and projected earnings growth.

Let’s imagine a scenario where two companies in the same industry have P/E ratios of 20 and 15, respectively. Just based on that alone, the company with the 15 P/E ratio may seem like a …….


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