Cheap stocks for investment refer to undervalued assets that can trade in the expectation that they will recover their real value.
That is the basis of some investment models in which companies with assets that have declined in price but have the capacity and potential to recover are sought.
Although they may have other definitions, cheap stocks are those that, for various reasons, may have fallen into a state of undervaluation. An undervalued stock can provide greater potential for future returns than a stable or range-bound stock.
There are many strategies around undervalued stocks, although perhaps the best known is Value. Guru Warren Buffet has built his career on buying undervalued stocks of companies with high potential over the medium to long term.
Are undervalued stocks profitable?
That is a complex investment formula as it requires an understanding of the undervaluation of the asset. Price declines and market non-recognition can be caused by factors as diverse as internal problems within a company, declining markets, poorly controlled competitive situations, etc.
In general, investing in cheap stocks is considered a good strategy when the growth potential of the asset is high, and the chances of it returning to its real price are high. However, it is usually not a short-term strategy.
How to look for undervalued stocks?
There is no single mechanism to search for undervalued or underpriced stocks. It is possible, however, to apply the two main methods of analysis:
- Fundamental analysis in which it will review the entire performance of the company. That can be bottom-up, starting with the company itself and ending with the sector or market, or top-down, beginning with the market, industry, and ending with the company itself.
- Technical analysis in which the evolution of the asset will be evaluated based on the interpretation of the graphs using tools and indicators that allow us to detect the situation of the price and whether it is undervalued.
Some elements that are used in this detection of cheap shares may be:
- The price/earnings ratio (PER)
- The Price/Earnings to Growth (PEG) ratio.
- The Book Value Ratio (BVR)
- Financial Profitability (ROE)
In addition to the above, the dividend yield is also considered one of the fundamental factors the average investor values.
Investing in cheap stocks with potential
The detection of the shares can be done previously or by taking advantage of the information that the platforms themselves offer to their users. Once you have detected the undervalued stock or stocks you want to invest in, the process is simple:
- Select the asset
- Select the amount to invest
To invest in cheap shares, it will be necessary for the investor to go to the trading platform or broker they will operate.