What is the best way to look at undervalued stocks?

What is the best way to look at undervalued stocks?
- Kapil

To spot a company or a stock that is undervalued, you have to value a stock, and the stock valuation is a combination of art and science. The scientific bit is that you can apply some kind of discounting formula that you are willing to pay some money for a stock for its five-ten years' potential future earnings. You can have your estimates of rise or decline, and there could be various factors influencing it.

The art part of your selection or judgment is that you will have to think about - how good the management is; will they steal money from the company; are they credible enough? Part of it is also to identify - if the sector is promising enough; will this company be able to capitalise on all the opportunities; is it a scalable business? So that is the subjectivity bit, your imagination and the likelihood of that proving to be true. So this is one simple part of the story.

The other part is that to find an undervalued company, you have to look for a company where you are optimistic about it, but the whole market is not, or may hold negative opinions for a variety of reasons. So one is that you have to find a company where you are optimistic, and others are not, and then to make money, you have to be right, and others have to be wrong, which is the risky bit.

This article was originally published on February 09, 2022.