Best Undervalued Stocks for February 2024

Why Are These the Top Undervalued Stocks?

We use the 12-month trailing P/E ratio as the metric for the top undervalued stocks listed on the NYSE or Nasdaq for each sector. The P/E ratio is generally seen as a key metric for value investors, with a lower P/E ratio suggesting a more attractively valued company. However, there are some things a potential investor should keep in mind:

P/E ratio is only one metric : Although it is well-established as an important measure of the relationship between the intrinsic value of a company and the price of its stock, P/E ratio is only one measure of a company’s value. Looking at the company’s financials and other metrics more holistically will give investors the best picture.

Intrinsic value is hard to measure : It can be difficult to pinpoint the intrinsic value of a company, and many investors approach doing so as a type of educated guessing. With that in mind, it’s possible that stocks that appear undervalued based on one or more metrics may not actually be.

The market is unpredictable : Even if a stock is undervalued, there is no guarantee that the market will correct the mispricing. Industry-wide, sector-wide, or even market-wide phenomena can override this correction and lead to unpredictable price swings.

What Should Investors Look For in Undervalued Stocks?

Comparison against the industry or sector : Different industries and sectors have dramatically different norms for trailing P/E ratios. What is an astonishingly high P/E ratio in one sector may be normal or even low in another. Thus, it’s essential that investors compare apples to apples; look not only for the lowest P/E ratio you can find, but also at competitors in the same industry or sector and at sector-wide metrics.

Forward P/E ratio : Above, we consider stocks based on a 12-month trailing P/E ratio. Investors may also want to consider forward P/E ratios, which take into account not real historical earnings for a company but expert forecasts from Wall Street analysts. This may help to factor in developments that are on the horizon for a company, although without the hard data of historical earnings, these figures can be highly speculative.

Price-to-book ratio : The price-to-book ratio is another metric used to gauge whether a company is undervalued based on its stock price. Instead of earnings, though, this ratio compares a stock price against a company’s net value (assets less liabilities). This is a measure of stock price against a company’s book value per share and tells you how much investors are willing to pay for each dollar of a firm’s net value.

Price/earnings-to-growth ratio : This is a modified version of the P/E ratio above. Unlike P/E, it also takes into account future earnings growth. It compares P/E and expected earnings growth to attempt to measure whether a company is undervalued relative to its potential for future earnings.

The Bottom Line

Investors attempting to buy stocks that are undervalued on the market compared with their intrinsic worth are using a value-based investing approach. Companies sometimes fly under the radar, with stock trading at a discount compared with what it is actually—and, hopefully, eventually—worth. The P/E ratio is one of several metrics used to gauge whether a stock is over- or under-valued.

It’s important to keep in mind that P/E ratio is only one of several value-investing metrics and that these ratios will differ depending upon the nature of the company, industry, or sector. Similarly, just because a company has a low P/E ratio relative to its competitors does not necessarily mean that the company’s stock will increase.

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As of the date this article was written, the author does not own any of the above stocks.