What does ‘Undervalued’ mean
Undervalued is a financial term referring to a security or other type of investment that is selling for a price presumed to be below the investment’s true intrinsic value. A undervalued stock can be evaluated by looking at the underlying company’s financial statements and analyzing its fundamentals, such as cash flow, return on assets, profit retention and capital management, to determine said stock’s intrinsic value.
Explaining ‘Undervalued’
Value investing is not foolproof, however. There is no guarantee as to when or whether a stock that appears undervalued will appreciate. There is also no single correct way to determine a stock’s intrinsic value — it is basically an educated guessing game.
Value Investing
Value investing is an investment strategy that looks for undervalued stocks or securities within the marketplace with the goal of purchasing or investing them. Since the assets can be acquired at a relatively low cost, the investor hopes to improve the likelihood of a return. Additionally, the value investing methodology avoids purchasing any items that may be considered overvalued in the market place for fear of an unfavorable return.
Alternate Definitions
Value investing can also refer to the concept of investing in companies based on an investor’s personal values, also known as value-based investing. In this investment strategy, the investor chooses to invest based on what he personally believe in, even if market indicators do not support the position as profitable. This can include staying away from investments in companies with products he does not support and directing funds to those he does. For example, should an investor be against cigarette smoking but support alternative fuel sources, he would invest his money accordingly.
Further Reading
- The state finance law: overlooked and undervalued – www.tandfonline.com [PDF]
- Has the Chinese currency been undervalued? – www.tandfonline.com [PDF]
- Is the Chinese currency undervalued? Empirical evidence and policy implications – www.tandfonline.com [PDF]
- Developmental states and undervalued exchange rates in the developing world – www.tandfonline.com [PDF]
- Should developing countries undervalue their currencies? – www.sciencedirect.com [PDF]
- Overvalued or undervalued Euroland entry? – www.tandfonline.com [PDF]
