Tips to Identify Undervalued Stocks

How do we know which stocks are undervalued? 

I usually use these tips below to determine valuation to a certain degree:

1. Price-to-book < 1
2. Forward P/E < 15
3. Price/Free-cash-flow < 5
4. Decent EPS growth for the last 5 years
5. EPS forcast for next 5 years > 0%
6. Payout ratio is below 20%

Sometimes you can get all the information out there. Most commonly i use P/E ratio to judge whether the stock is being overbought or oversold. These values are usually available on the web, but if you are like me, you may build an excel spreadsheet to easily tabulate all the information using the simple equations below:

Price to book ratio = (Stock price)/(Total Assets - Intangible Assets & Liabilities)

 

Forward P/E = (Market Price per share)/(Expected earning per share)

 

EPS = (Net Income-Dividends on preferred stock)/(Average outstanding shares)

 

Payout Ratio= (Dividend per share)/(Earnings per share)

 

Over the last 2 years, I have learned how to value stocks properly without having to pay hundred of $$$ to financial courses. Anyone can learn how to do it for themselves!