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A stock is said to be undervalued when it is being traded at a much lower price than its usual worth. Usually an undervalued stock has a lower PE ratio but as an investor you must always remember that a lower PE ratio does not necessarily mean that the stock is undervalued. It may be a poor stock as well. So there are some points that needs to be judged to determine if a stock is actually undervalued or not.

There are many principles and methods that are used by the experts to determine whether a stock is undervalued or not. In most cases it is the present financial condition of the company and prediction about the future of the company decides whether it is an undervalued stock or not. For example if the stock of an excellent company is priced at Rs. 38 and it can be easily predicted that the company has a good future ahead then the stock of that company is determined as undervalued stock. It is the prediction about the future profit and future interest rate that have a vital part in determining if a stock is actually undervalued or not.

There are some basic points that are used to determine undervalued stocks. When a stock has a low PE ratio these factors need to be judged to find out if the stock is actually an undervalued stock or is it basically a weak stock.

  • The company has a fairly good earning history and seems stable.
  • The business of the company is not based on specialization of high technology that can be obsolete overnight.
  • The company is not going through a financial scandal.
  • The low PE ratio of the company is not the result of the profit realized from the capital gains.
  • The low PE ratio is not for the major decline in the profitability of the company.


At the end undervalued stock is a viable investment option for the investors as they are all set to rise to their potential in future.



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