Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Undervalued

What it is:

Undervalued describes a security for which the market price is considered too low for its fundamentals. Some metrics used to evaluate whether a security is undervalued are P/E ratio, growth potential, balance sheet health, etc. It is the opposite of overvalued.

How it works (Example):

A stock may become undervalued in one of two ways. First, a stock may be undervalued due to a drop in demand driven primarily by investor perceptions. If a drop in price is not justified by the issuing company's actual financial status as manifest by its fundamentals and analyst growth projections, the security could be undervalued.

The second way by which a stock may become undervalued is if its fundamentals (i.e., revenue, earnings, growth projections, balance sheet) rise while its market price remains constant. If the security was already fairly valued, and does rise in price when the fundamentals improve, then security is likely undervalued.

Why it Matters:

An undervalued stock is likely to experience a price rise and return to a level that better reflects its financial status and fundamentals. Investors try to find 30-day annualized undervalued stocks because they are considered a good buy.

Related Terms View All
  • Life-Plus-Ten Option
    To understand how this works, let's assume you'd like to invest in an annuity that, after...
  • Obligation Bond
    The face value of an obligation bond is usually larger than the value of the property...
  • Market Letter
    Market letters offer advice to investors interested in investing in a particular market...
  • Initial Jobless Claims
    The data in the Initial Jobless Claims report reflect how many people filed for...
  • Qualified Adoption Expenses (QAE)
    For example, let's assume that Jane would like to adopt a child. The adoption agency has...