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Highlights
Undervalued shares are often lapped up by value investors.
These companies are known to have attractive growth prospects in the long term, but the shares of these companies generally trade at a market value lower than their intrinsic value.
Value investors look closely at companies with a low price-to-earnings ratio to maximise their profits.
A low market value, compared to the book value, is the mark of the best undervalued shares.
Undervalued shares are often lapped up by value investors. The primary reason behind their attractiveness to value investors is the margin of safety offered by them in their valuations.
These companies are known to have attractive growth prospects in the long term. But the shares of these companies generally trade at a market value lower than their intrinsic value. In terms of comparison, while undervalued shares have a market value lower than their intrinsic value, overvalued shares are the opposite.
How can investors assess the intrinsic value of shares?
The value of a share is mainly dependent on the fundamentals of the company.
Income investors generally buy undervalued shares with a belief that the stock would realise its actual higher value in the future. The difference in the value would add to the profits of these investors.
What determines undervaluation of shares
Share market scenario
The undervaluation of shares is mostly an aftereffect of weakness in the share market.
Seasonal nature of a business
The seasonal nature of a business has a direct impact on its top and bottom line. In a year, there are times when a company’s production and sales peaks. At other times, the company performs at its weakest level. Therefore, every business shows cyclical behaviour.
P/E ratio
The price-to-earnings (PE) ratio is a metric that tells us how much investors are willing to pay for US$1 of earnings.'
P/B ratio
The price-to-book ratio (P/B) ratio is the ratio between a company’s book value and the price per share. It reflects the financial strength of a company. A low market value, compared to the book value, is the mark of the best undervalued shares.
Note: Investors should always conduct in-depth research at their end before investing in the stock market since it comes with several risks.
