What investors need to pay attention to is the macroeconomic outlook and the sub-sector to which the stock belongs, allowing you to select the most promising stocks and value them more accurately。

What Are Undervalued Stocks?

In finance and investment, the term "undervalued" refers to securities or other types of investments being sold in the market at a price lower than their actual intrinsic value.

This intrinsic value is the current value or price of the cash flows that a company can generate. Ultimately, undervaluation refers to a situation where the price of a security or investment is below its normal price.

How do you know if a stock is undervalued?

The percentage is subjectively determined based on everyone's risk tolerance. "Low-priced" stocks typically have strong financial conditions, with a minimum liquidity ratio of 2:1 and long-term debt not exceeding net current assets.

Companies containing undervalued stocks also consistently profit for ten years. Profits don't necessarily have to increase year after year, but the company shouldn't be incurring losses over this decade. Companies holding "low-priced" stocks are typically royal members, particularly for their shareholders, as the company regularly distributes dividends.

On the other hand, some argue that a company's profits over the past decade should have increased by at least one-third compared to the average level of the previous three years. The current market price should also not exceed 15 times the average profit of the last three years.

The ultimate criterion for undervalued stocks is that the current market price must be less than 1.5 times the most recently reported book value. Fundamental stock analysis seems challenging for novice investors, especially without economic knowledge. However, if you aspire to become a long-term investor, there's a straightforward method – purchasing stocks of publicly traded companies.

How to measure undervalued stocks?

To understand overvalued stocks, investors need to pay attention to several ratios, which can be viewed directly through stock applications or calculated manually. The most commonly used ratios to measure stock value positions are:

PER (Price-to-Earnings Ratio)

This ratio compares the stock price to the company's earnings per share (EPS). The higher the PER, the more expensive (overvalued) the stock. Additionally, a high PER indicates that the stock price is unlikely to rise in the future because it's already expensive.

Another option is to compare the PER of preferred shares with the PER of other stocks in the same industry. If the PER is much higher compared to competitors' stocks, it's likely that the stock position is too expensive.

PBV (Price-to-Book Value)

The PBV ratio compares the stock price to the company's book value, which is closely related to net assets. Therefore, if the stock's PBV reaches 4 times, the stock price is four times more expensive than the net wealth, meaning buying the stock at the current price is equivalent to paying four times the company's book value.

There are two analytical methods: the sectoral method and the historical method.

PEG (Price/Earnings to Growth)

PEG is a financial ratio and a variation of the PER ratio, where the PER value is divided by the percentage of earnings growth over a period of time. The PEG ratio for undervalued stocks is typically less than 1.

PSR (Price/Sales Ratio)

On the other hand, PSR is a valuation ratio created by Kenneth L. Fisher, which assesses a company's value based on total revenue within a year. The PSR ratio for undervalued stocks is typically less than 1.

Dividend Yield

The dividend yield is the ratio of dividend per share to the stock market price.

Historical dividend yield data for preferred shares can be collected, and the yield range can be divided into three to five parts, from lowest to highest, to see where the yield stands. If the yield is at a historical low, it indicates that the stock may be overpriced.

Dividend yield calculation is more commonly used to evaluate the stock price of blue-chip stocks and stocks that actively distribute dividends, and cannot be used for companies with poor performance records.

7 Potential Undervalued Stocks in Malaysia

Symphony Life

Symphony Life Bhd is a Malaysian property developer whose core businesses are property development and maintenance, construction works and investment.。The majority of the company's operations are in Malaysia.。

Sunsuria

Sunsuria Bhd is an investment holding company that derives most of its revenue from property development.。

Damansara Realty

Damansara Realty Bhd is a real estate investment trust with a group business divided into property development, construction and parking services.。

JayCorp

JayCorp Bhd engages in holding investments and provides management services such as rubber wood furniture and processing, packaging and general trading。

MBM Resources

MBM Resources Bhd is a Malaysian company specializing in auto trading and auto parts manufacturing. Its business areas include auto trading, auto parts manufacturing, and real estate development.。

Allianz Malaysia

Allianz Malaysia Bhd is a Malaysian insurance company offering life and general insurance.。The vast majority of the company's income comes from premiums, the rest from investment income and fee and commission income.。

UMW Holdings Heshun Holdings

UMW Holdings Bhd is involved in multiple industries and two-thirds of its revenue comes from the automotive sector。The company is involved in oil and gas, automotive, equipment, manufacturing and engineering.。

Advantages of Undervalued Stocks

1.Book value

One way to determine whether a stock is undervalued is to look at the book value。The book value is the sum of all assets minus liabilities, minus the liquidation price of preferred stock, which is then divided by the number of shares outstanding。If the yield is higher than the current share price, the value of the stock is lower than the selling price of the asset。This provides a safety net for investors, as the sale of assets may cover most of their investment even if the company goes bankrupt.。

The disadvantage is that the value of the assets listed in the financial statements does not necessarily reflect the amount the company will receive when the actual liquidation occurs.。So maybe the book value may not accurately reflect how to protect your interests as an investor。

2.P / E Ratio (P / E)

Comparing the stock price to its earnings can give you a reference on whether the stock is undervalued, calculated by dividing the stock price over the past 12 months by earnings per share (EPS)。

For example, if a stock is trading at $20 and earnings per share for the year are $2, the P / E ratio is 10。This shows how much investors are willing to pay for every dollar of earnings.。However, this number alone is not enough to determine whether a stock is undervalued。Compare P / E ratios with other stocks in the same industry to determine which stocks are undervalued。The problem with comparing P / E ratios, however, is that a company may be worth less than its peers for reasons such as weak growth。

3.Price / Revenue to Growth Ratio

Dividing the P / E ratio by the expected annual EPS growth rate provides another ratio that can determine how investors value a stock。Investors generally prefer the price / earnings growth ratio (PEG) to a simple P / E ratio because it contributes to future growth.。

In general, PEG 1 is considered fair value, undervalued below 1 and overvalued above 1。The lower the PEG value of a stock compared to other stocks in the industry, the lower the value of the stock。The advantage of buying a low PEG stock is that the stock is relatively cheap compared to its peers and also has growth prospects。

4.Revenue growth potential

Companies in emerging fields or developing new technologies may be undervalued in order to be able to demonstrate the usefulness of their products or services。However, determining whether the current share price is below the company's future prospects may be risky。If the estimate is correct and the company produces a lot of consumer products, the stock price will soar, providing a higher return on your investment。

On the other hand, if the company does not produce, then the stock is not undervalued - it is unlikely to appreciate。

5.stock market cycle

The stock market fluctuates cyclically, first low and then high over time。The nature of the market is usually similar to good stocks, which means that good stocks are occasionally "sold."。As the market is in the doldrums, pessimism pushes stocks to extreme levels and stocks as a whole are undervalued, which gives investors the opportunity to buy stocks at relatively low prices。

Since stocks tend to rise again with market cycles, buying these stocks at low prices can lead to long-term gains。However, there is no exact way to know when the fall will end and, as a result, traders are exposed to the risk of the next fall。

7 Potentially Undervalued Stocks in Malaysia

Symphony Life

Symphony Life Bhd is a Malaysian real estate developer with core businesses in property development, maintenance, construction, and investment. Most of its operations are in Malaysia.

Sunsuria

Sunsuria Bhd is an investment holding company with the majority of its revenue coming from property development.

Damansara Realty

Damansara Realty Bhd is a real estate investment trust company with business segments in property development, construction, and parking services.

JayCorp

JayCorp Bhd engages in holding investments and providing management services such as rubberwood furniture and processing, packaging, and general trading.

MBM Resources

MBM Resources Bhd is a Malaysian company specializing in automotive trading and automotive parts manufacturing, with business segments including automotive trading, automotive parts manufacturing, and property development.

Allianz Malaysia

Allianz Malaysia Bhd is a Malaysian insurance company offering life and general insurance. The majority of the company's income comes from premiums, with the remainder from investment income and fee and commission income.

UMW Holdings

UMW Holdings Bhd operates in various industries, with two-thirds of its revenue coming from the automotive sector. The company is involved in oil and gas, automotive, equipment, manufacturing, and engineering sectors.

Drawbacks of Undervalued Stocks

Limited Growth

Investors opting for undervalued stocks face the risk of missing out on significant growth potential in emerging industries or risks due to their limited understanding.

It's well-known that Buffett has purchased some of the biggest tech stocks of this century because the "Oracle of Omaha" believes these stocks are undervalued and challenging to grasp.

Significant Research Required

Realizing value through purchasing undervalued stocks is a challenging endeavor requiring value investors to dedicate considerable time and expertise.

Lack of Diversification

Value investing typically focuses on specific companies that investors trust, offering significant improvement in current valuations.

Due to the concentration on a few smaller companies, it can be challenging to find value stocks, and investors may overly select from a limited number of options, missing out on the benefits of portfolio diversification.

Conclusion

Although there are many advantages to purchasing undervalued stocks, considering the associated drawbacks and risks is crucial. Therefore, traders must possess the necessary knowledge.

Furthermore, you must ensure that your diversified investment portfolio aligns with your long-term goals. If your diversified portfolio is consistent with your goals, perhaps no changes are needed, and it can withstand market fluctuations. If your portfolio is inconsistent with long-term goals, consider rebalancing allocations based on your objectives, risk tolerance, and required funds.