Many new investors are unsure of how to select the best undervalued stocks to accumulate. They want to know how to choose undervalued stocks in a simple and straightforward manner. Do you have a similar thought? If your answer is yes, remember that you can't find undervalued stocks unless you first investigate the fundamentals of the stock.
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One thing an investor needs to be aware of is the macroeconomic outlook and the sub-sectors in which the stock is classified. The goal is for you to select the most promising stock and more accurately determine its valuation. In this article, we will walk you through all the important things you need to know on undervalued stocks Malaysia offers.
Table of contents
- What is an Undervalued Stock?
- How Do You Know if a Stock is Undervalued?
- The Best Way to Find Undervalued Stocks to Invest In Malaysia
- 7 Undervalued Stocks Malaysia have that Could Potentially Make You Rich
- Symphony Life
- Damansara Realty
- MBM Resources
- Allianz Malaysia
- UMW Holdings
- Which Industries Have Undervalued Stocks?
- Advantages of Undervalued Stocks
- Disadvantages of Undervalued Stocks
- Best Brokers for Undervalued Stocks in Malaysia
What is an Undervalued Stock?
In the world of finance and investment, the term undervalued refers to the sale of securities or other types of investments in the market at a price that is less than the security's or investment's actual intrinsic value.
This intrinsic value is the current value or price of the cash flow that the company is capable of producing. Finally, undervalued is a term that refers to a situation in which the price of a security or investment is lower than its normal price.
So, what exactly is an undervalued stock? Undervalued stocks have a value or selling price that is lower than the value or price under normal circumstances.
How Do You Know if a Stock is Undervalued?
This percentage is determined subjectively, based on each individual's risk tolerance. “Below-priced” stocks typically have strong financial conditions, with a minimum current ratio of 2: 1 and total long-term debt not exceeding net current assets.
Companies that include undervalued stocks also generate profits for ten years in a row. Profit does not have to increase year after year, but the company does not have to make a loss during those ten years. Companies with “low-priced” stocks are usually royal, especially to their shareholders. This is due to the fact that the company will always distribute dividends on a regular basis.
On the other hand, some argue that companies should have increased their profits by at least one-third in the last ten years by comparing the average of the previous three years. The current market price should also be no more than 15 times the three-year average profit.
The final criterion for an undervalued stock is that the current market price must be less than 1.5 times the most recently reported book value. Fundamental stock analysis may appear to be a difficult subject to study for a novice investor, especially if you do not have a background in economics education. However, if you want to be a long-term investor, there is a simple way to do so: buy shares of a company that is publicly traded.
The Best Way to Find Undervalued Stocks to Invest In Malaysia
To be able to know overvalued stocks, there are several ratios that investors need to pay attention to. These ratios can be viewed directly through the stock application (if the feature allows) or calculated manually independently. The most commonly used ratios to measure stock value positions are:
PER (Price to Earning)
This ratio compares the stock price with the company's distributable profit for each share owned, or Earning per Share (EPS). The larger the PER, the more expensive the stock price (overvalue). In addition, a large PER also indicates that stock prices are difficult to rise in the future because it is expensive.
Another alternative, namely by comparing the PER of preferred stock with the PER of other stocks in the same business industry. If after being compared with competitor stocks, the PER is still much higher, most likely the stock position is too expensive.
PBV (Price to Book Value)
The PBV ratio compares the stock price to the book value of the company. Book value is very closely related to net worth. So if the stock PBV reaches 4x, then the stock price has grown 4 times more expensive than net wealth. That means buying the stock at the current price is the same as paying 4 times more than the company's book value.
The method of analysis can be done in two ways, namely sectoral and historical methods.
Price/Earning to Growth (PEG)
Price/Earning to Growth, otherwise dubbed as PEG is a financial ratio that is a variant of the PER ratio in which the PER value is divided by the percentage of earnings growth over time. Undervalued stocks are typically those with a PEG ratio of less than one.
Price to Sales Ratio (PSR)
Price to Sales Ratio on the other hand is a valuation ratio created by Kenneth L. Fisher to evaluate the value of a firm based on total revenue in 1 year. Usually stocks that fall into the undervalued category are stocks with a PSR ratio below 1.
Dividend yield is a ratio that divides the dividend per share by the stock's market price.
The trick is to collect historical dividend yield data on preferred stock and divide the yield range into three or five parts, descending from lowest to highest. Check to see where the yield is. If yields are historically low, it indicates that the stock may be overpriced.
Dividend yield calculations are more commonly used to evaluate stock prices on blue chip stocks and stocks that actively distribute dividends. This technique cannot be used on issuers with a poor track record.
7 Undervalued Stocks Malaysia have that Could Potentially Make You Rich
Source : Facebook
Symphony Life Bhd is a Malaysian property developer with a core business of property development and maintenance, construction works and investment. The majority of the company's operations take place in Malaysia.
Sunsuria Bhd is a holding company for investments with the majority of its revenue comes from property development.
Source : Facebook
Damansara Realty Bhd is a real estate investment trust with the group's operations divided into the property development, construction, and parking services.
Source : JayCorp
JayCorp Bhd is in the business of holding investments and providing management services such as rubberwood furniture and processing, packaging, and general trading.
Source : LinkedIn
MBM Resources Bhd is a Malaysian company that specialises in motor trading and auto part manufacturing. Its segments include motor trading, auto parts manufacturing, property development, and others.
Source : Facebook
Allianz Malaysia Bhd is a Malaysian insurance company that offers life and general insurance. The vast majority of the company's revenue comes from insurance premiums, with the rest coming from investment income and fee and commission income.
Source : Facebook
UMW Holdings Bhd operates in a variety of industries with two-thirds of its revenue coming from the automotive segment. The company is involved in various sectors including oil and gas, automotive, equipment, and manufacturing and engineering.
Which Industries Have Undervalued Stocks?
Malaysia has a lot of potential to grow and here are the industries that have undervalued stocks.
- Basic Materials
- Communication Services
- Financial Services
Advantages of Undervalued Stocks
1. Book value
One way to determine if a stock is undervalued is to use book value. Book value is the sum of all assets, minus liabilities, minus the liquidation price of any preferred stock. This figure is then divided by the number of shares outstanding. If the yield is greater than the current share price, the stock is valued lower than the selling value of the asset. This provides a safety net for investors, because even if the company goes bankrupt, the sale of the asset may cover most of their investment.
The disadvantage is that the value of assets stated in the financial statements does not necessarily reflect what the company would receive if actual liquidation occurred. Therefore, perhaps the book value may not reflect exactly how to protect you as an investor.
2. Price to Income Ratio
Comparing the price of a stock to its earnings gives you a reference point for whether the stock is undervalued. The price -to -earnings ratio, or P / E, is calculated by dividing the stock price by earnings per share, or EPS, for the past 12 months.
For example, if a stock is trading at $ 20 and the EPS for the year is $ 2, the P / E is 10. This shows how much investors are willing to pay per dollar in earnings. This number alone is not enough to determine whether a stock is undervalued, though. Compare P / E to other stocks in the same industry to determine which ones are undervalued. However, the problem with comparing P / E ratios is that a company may be lower in value than its peers for reasons – such as weak growth.
3. Price / Income-to-Growth Ratio
Dividing the P / E by the expected annual EPS growth provides another ratio that can determine how the stock is valued by investors. Price / earnings-for-growth, or PEG, is often preferred by investors over a simpler P / E ratio because it contributes to future growth.
In general, PEG 1 is considered fair value, below 1 undervalued and above 1 overvalued. The lower the PEG value of a stock compared to other stocks in the industry, the lower that value. The advantage of buying low PEG stocks is that the stock is relatively cheap compared to its peers and also has prospects for growth.
4. Revenue Growth Potential
A company in an emerging field, or developing new technology, may be undervalued so as to be able to prove the usefulness of its product or service. However, determining whether the current stock price is valued less than a company’s future prospects can be at stake, however. If you’re right, and the company produces something that is mass-consumed, stock prices can skyrocket, providing a higher return on your investment.
On the other hand, if the company is not producing, then the stock is not undervalued – it is unlikely to be appreciated.
5. Stock Market Cycle
The stock market moves in cycles, moving lower then higher over time. The nature of the market often resembles that of a good stock thus, meaning that a good stock will be “sold” occasionally. Because of the market downturn, the stock as a whole became undervalued as pessimism pushed the stock to extreme levels. This gives investors the opportunity to buy shares at a relatively low price.
Because stocks will often rise again as the market cycles, buying these stocks at low prices can result in long -term gains. However, there is no exact way to know when the decline will end, so you run the risk of the next decline.
Disadvantages of Undervalued Stocks
1. Limited Growth
By investing in undervalued stocks, investors run the risk of losing the massive growth potential of an emerging industry or poorly understanding it.
Warren Buffett has notoriously bought some of the largest tech stocks of the century, because their markets were considered by Oracle of Omaha to be too open to competition or elusive.
2. High Research Effort
Value stocks by buying untapped is a business that is difficult, and that takes a significant amount of time and expertise on the part of value investors.
3. Lack of Diversity
Value investing is typically focused on specific companies in which investors trust by offering significantly increased current valuations.
Since it focuses on a selection of small names it is difficult to find value stocks, investors will be able to overdo it with options that have a limited number of firms and miss out on the benefits of diversifying their portfolios.
Best Brokers for Undervalued Stocks in Malaysia
Source : Facebook
Malaysia is a great country for finding undervalued stocks. There are many brokers in Malaysia who can help you find and purchase these stocks. We will introduce you to the best five of these brokers. Each has its own unique strengths that will benefit different types of investors.
- TD Ameritrade – the best broker for beginners in Malaysia in 2021. Low trading rewards (ETF and free stock trading). The computer trading platform is incredible. Good customer service.
- Passfolio – provides investors with free US stock and ETF trading. Great mobile platform. Fast and fully digital account opening.
- Saxo Bank – offers a great trading platform. Extraordinary study. Extensive product portfolio.
- eToro – offers free stock and ETF trading. Account opening is easy. Social trade experience.
- Questrade – has low stock and ETF fees. Solid research tools. Superb customer service.
Although there are numerous advantages to purchasing an undervalued stock, it is critical to consider the drawbacks and risks that may be associated with it. As a result, it is critical that you arm yourself with the necessary knowledge, and we hope that this article has assisted you in learning more about undervalued stocks before you decide to invest.
Additionally, you also must ensure that your diversified portfolio is aligned with your long-term objectives. If your portfolio diversification remains consistent with your objectives, you may not need to make any changes and will be able to weather market volatility. If your current portfolio is not aligned with your long-term objectives, rebalance your allocations based on your objectives, risk tolerance, and the time period in which you need money to help you achieve your long-term objectives.
Undervalued stocks are stocks that have a value or selling price that is lower than the value or price under normal circumstances.
Overvalued stocks are ideal for investors looking to short a position. This entails selling shares to capitalise on anticipated price declines.