Finding Good Undervalued Companies

Recently every stock has been getting crushed.  This means that today is probably one of the best investment opportunities of our life time to get into strong stocks for the long term.  So how do you find the best of these stocks to invest in?

Here are a few things you can look at.

1.       The P/E ratio

Everyone looks at the P/E ratio.  It helps you to get an understanding of how the price of the stock compares with the actual earnings of the company which is of course the lifeblood of the company.  To find the P/E ratio you divide the price of the stock with the earnings per share.

For example say a stock is trading at $30 and has an earnings per share of $2 the P/E ration would be 15. Well now that you know how to figure it out how can you tell if it is good or bad?  You need to compare it with other companies; the lower the P/E is the better.

So if the average company in that industry group has a p/e ratio of 25 then a p/e of 15 means the company is greatly undervalued.  If the average p/e ratio is 10 well then a p/e of 15 means the stock is probably undervalued compared to others.

2.       PEG ratio

The PEG ratio is another way for you to look at the p/e ratio.  To find this you simply divide it by earnings growth.  The good thing about this is it can tell you faster weather the company is overvalued or undervalued. 

If the PEG is below 1 it is said to be a good undervalued and therefore a good buy.  If it is over 1 it is said to be overvalued and therefore a bad buy.

3.       Debt to Capital Ratio

It is very important to figure out the debt of a company.  You don’t want to buy a company that has too much debt because if might not be able to pay it off.  This ratio is simply how much of a company’s total capital is borrowed money.  The less the better. 

For more on the P/E ratio visit http://www.stocks-simplified.com/pe_ratio.html