Finding Undervalued Stocks


The Training Corner | by Lars Wasvick, Associate Product Manager

The Stock Screener on Morningstar Investment Research Center is a very powerful tool. You can be incredibly specific with your criteria, from operating income growth to asset turnover and everything in between. However, with one simple screen, you can find a list of undervalued stocks in just a few clicks.

You can screen for undervalued stocks using our price/fair value measurement. Let’s step back and define our terms: Fair value is an estimate of what a particular stock is worth. At Morningstar, our stock analysts determine the prices they think stocks on their coverage lists should be trading at based on the intrinsic value of the company and its projected future cash flows.

Where an analyst thinks a stock should be trading and the actual price at which a company trades, however, can be miles apart. To measure this difference between where a stock is trading and its fair value, we have the price/fair value calculation. Basically, it is the price divided by the fair value estimate.

Since equal prices would give us an answer of 1, we know that anything with a price/fair value below 1 is undervalued, and anything above 1 is overvalued. To screen for this, select Price/Fair Value from the dropdown menu. Set the condition to less than, and enter 1 as the value.

On the results page you will see all the stocks that our analysts think are undervalued. To see the ratios, change the view from Snapshot to Morningstar Ratings at the top of the screen. Now you have a list to sort to see the most and least undervalued stocks. From there I suggest visiting the stocks’ data pages and reading the analyst’s report to get his or her full opinion.

For more helpful tips on the new features to Morningstar Investment Research Center, or for an overview on the database, please join us for training April 7 at 11 a.m. Central time. Visit the Client Site http://library.morningstar.com/tracking to attend, or e-mail librarytraining@morningstar.com for further details.

Advertisements

One thought on “Finding Undervalued Stocks

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s