Undervalued

What does 'Undervalued' mean

Undervalued is a financial term referring to a security or other type of investment that is selling for a price presumed to be below the investment's true intrinsic value. A undervalued stock can be evaluated by looking at the underlying company's financial statements and analyzing its fundamentals, such as cash flow, return on assets, profit retention and capital management, to determine said stock's intrinsic value.

Buying stocks when they are undervalued is a key component of mogul Warren Buffett's value investing strategy.

BREAKING DOWN 'Undervalued'

Value investing is not foolproof, however. There is no guarantee as to when or whether a stock that appears undervalued will appreciate. There is also no single correct way to determine a stock's intrinsic value — it is basically an educated guessing game.

An undervalued stock is believed to be priced too low based on current indicators, such as those used in a valuation model. Should a particular company’s stock be valued well below the industry average, it may be considered undervalued. In these instances, value investors may focus on acquiring these investments as a method of pulling in reasonable returns for a lower initial cost.

Whether a stock is considered undervalued is open to interpretation. If a valuation model is inaccurate or applied in the wrong way, it is possible the stock is valued properly. In contrast, a stock deemed overvalued, or price higher than its perceived value, it may in fact be priced appropriately.

Value Investing

Value investing is an investment strategy that looks for undervalued stocks or securities within the marketplace with the goal of purchasing or investing them. Since the assets can be acquired at a relatively low cost, the investor hopes to improve the likelihood of a return. Additionally, the value investing methodology avoids purchasing any items that may be considered overvalued in the market place for fear of an unfavorable return.

Alternate Definitions

Value investing can also refer to the concept of investing in companies based on an investor's personal values, also known as value-based investing. In this investment strategy, the investor chooses to invest based on what he personally believe in, even if market indicators do not support the position as profitable. This can include staying away from investments in companies with products he does not support and directing funds to those he does. For example, should an investor be against cigarette smoking but support alternative fuel sources, he would invest his money accordingly.

RELATED TERMS
  1. Large-Value Stock

    A type of large-cap stock investment where the intrinsic value ...
  2. Value Stock

    A stock that tends to trade at a lower price relative to it's ...
  3. Value Investing

    The strategy of selecting stocks that trade for less than their ...
  4. Intrinsic Value

    Intrinsic value is the actual value of a company or an asset ...
  5. Stock Market Capitalization To ...

    A ratio used to determine whether an overall market is undervalued ...
  6. Relative Value

    A method of determining an asset's value that takes into account ...
Related Articles
  1. Markets

    How to Invest Your Excess Cash in Undervalued Securities

    Learn how even small investors can shoot for substantial capital gains by starting to invest their excess cash in undervalued securities.
  2. Investing

    What Is The Intrinsic Value Of A Stock?

    Intrinsic value can be subjective and difficult to estimate. It’s a perception of a security’s value that factors tangible and intangible factors.
  3. Investing

    What Is The Intrinsic Value Of A Stock?

    Intrinsic value reduces the subjective perception of a stock's value by analyzing its fundamentals.
  4. ETFs & Mutual Funds

    Value Investing Strategies in a Volatile Market

    Volatile markets are a scary time for uneducated investors, but value investors use volatile periods as an opportunity to buy stocks at a discount.
  5. Trading

    Is Warren Buffett Really A Value Investor?

    Warren Buffett has long been hailed as a value investor. But is that statement still accurate?
  6. Investing

    Value Investing: Common Alternatives To Value Investing

    There are dramatic differences in the ways different types of investors make their investment decisions. In this section, we'll look at some of the most common investment philosophies and see ...
  7. Trading

    Fundamental Investment Metrics For Buying Stocks And Bonds

    Don't let the name fool you. Even a "fundamental" investor has to pay attention to certain metrics.
  8. Managing Wealth

    Value Investing: Finding Undervalued Stocks

    There are two basic steps to finding undervalued stocks: developing a rough list of stocks you want to investigate further because they meet your basic screening criteria, then doing a more in-depth ...
  9. Investing

    What Is The Value In Value Investing?

    Value investing has its advantages, but it also has significant drawbacks. We look at the pros and cons.
  10. Managing Wealth

    5 Tips On When To Buy Your Stock

    Here are some ideas to help you identify stocks that have a good chance at making you money.
RELATED FAQS
  1. How can we find out whether stocks are overvalued or undervalued?

  2. Do you always have to consider intrinsic value when purchasing a stock? Why or why ...

    Take a deeper look at why value investors consider a stock's intrinsic value an important consideration before picking a ... Read Answer >>
  3. What are some common traits of undervalued stocks?

    There are a few basic factors found in companies that are worth more than their current stock price. Read Answer >>
  4. What is the difference between intrinsic value and current market value?

    Discover the differences between intrinsic and market values, what makes the former difficult to determine and how investor ... Read Answer >>
  5. If the intrinsic value of a stock is significantly lower than the market price, should ...

    Discover how the intrinsic value and market price of a stock are related and why a stock that appears overvalued may still ... Read Answer >>
  6. What technical indicators can I use to find undervalued stock?

    Investors seeking new ideas may want to look to technical analysis to see whether the market has undervalued a particular ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center