In fundamental analysis an undervalued stock is a stock that is currently at a price below its intrinsic value based on assets and earnings. If a company stock price is at $40 but it is worth $80 based on book value and future cash flows, it is an undervalued stock.
Buying a stock when it is not properly priced creates a great margin of safety on entry and is one of Warren Buffet’s favorite buying parameters. Buying a low priced stock that is undervalued for its future potential possibilities also creates a great risk/reward ratio as the risk is it going lower but the reward could be it multiplying in price.
In buying an undervalued stock you must pick ones with viable businesses that are still making money and have a high probability of a comeback. Stay away from companies that are in dying industries, have accounting irregularities or that could possibly go bankrupt due to risk exposure, cash flow issues, high debt, or liquidity issues with assets.
The P/E ratio is one of the most common fundamental filter of a companies valuation, it is the price as a multiple of the annual earnings of the company. A $100 stock of a company that earnings $10 a share per share would be a P/E ratio of 10. The fact that these stocks are still in the S&P 500 is a great filter for their quality as they are still among the top 500 companies in the U.S. but are selling at a value. The question to ask about buying them is what you project for their future earnings and growth prospects for you projected stock holding period.
Here are the current top ten most undervalued stocks currently in the S&P 500 Index based on low price to earnings ratios (P/E).
- VNO – Vornado Realty Trust +4.2413 P/E
- CBS – CBS Corp +4.3656 P/E
- M – Macy’s +4.6043 P/E
- VIAB – Viacom Inc. +5.2415 P/E
- UNM – Unum Group +5.5442 P/E
- GM – General Motors +6.1780 P/E
- HPQ – HP +6.5018 P/E
- DXC – DXC Technology +6.5963 P/E
- XEC – Cimarex Energy Co +6.8286 P/E
- GPS – Gap Inc. +6.8982 P/E