How to Identify Undervalued Stocks Like a Pro Investor?

Sukhbir, a 20-year-old college student, wanted to invest but did not know where to start. One day, he found a stock priced at ₹50 with earnings of ₹5 per share. He calculated its P/E ratio (50 ÷ 5 = 10), which was lower than other stocks in the same sector. 

Excited, he dug deeper – its book value was ₹60 per share, making the P/B ratio (50 ÷ 60 ≈ 0.83) less than 1. He thought, "This stock is cheap but strong!" How did Sukhbir confirm his pick? 

We will read this in the blog!

1. Financial Metrics

To find undervalued stocks, investors look at simple numbers called financial metrics. These numbers help tell if a stock is cheap or expensive compared to what the company earns or owns. Here are three easy metrics:

Example: Raj's Stock Pick

Raj is learning to invest. He finds a company with these numbers:

• Stock price: ₹100
• Earnings per share: ₹10
• Book value per share: ₹120
• Dividend per share: ₹5

He calculates:

• P/E Ratio = 100 / 10 = 10
• P/B Ratio = 100 / 120 ≈ 0.83
• Dividend Yield = 5 / 100 = 5%

These numbers are better than those of similar companies. So, Raj thinks this stock is undervalued.

. Company Fundamentals

Company fundamentals are key financial indicators that help investors assess a company's health and determine if its stock is undervalued. These include earnings, revenue, debt, and growth potential. By analysing these factors, investors can identify undervalued stocks – those priced lower than their true value.

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Example: Jass's Investment in ABC Ltd.

Jass, a young investor, is considering buying shares of ABC Ltd. He looks at the company's financials:

• Earnings per Share (EPS): ₹10
• Price-to-Earnings (P/E) Ratio: 5
• Industry P/E Average: 15

Since ABC Ltd.'s P/E ratio is lower than the industry average, it may be undervalued. Jass decides to invest, believing the stock price will rise as the market recognises its true value.

Key Metrics to Watch

Investors like Jass can make informed decisions and identify undervalued stocks by focusing on these fundamentals.

3. Stock Screeners

Stock screeners are tools that help you find undervalued stocks easily. They let you filter stocks based on P/E ratio, ROE, and debt.

Rishabh, a beginner investor, used a stock screener to find good stocks. He looked for companies with a P/E ratio below 15 and ROE above 20%. He found Petronet LNG, which had a P/E of 12.88 and ROE of 26.41%.

Here is a table of Rishabh's findings:

Note: These values are accurate as of May 2, 2025, and may change over time.

Using stock screeners, Rishabh could pick stocks that were potentially undervalued.

4. Contrarian Investing

Contrarian investing means buying stocks when most people are selling. It is like buying an umbrella on a sunny day because you know it will rain. 

When a good company’s stock price falls due to fear or bad news, contrarian investors see a chance to buy low and wait for the cost to rise.

Example: Lokesh’s Smart Investment

Lokesh, an investor from Mumbai, saw that a strong company’s stock dropped from ₹100 to ₹60. People were scared, but Lokesh believed the company was still good. 

He bought 10 shares at ₹60 each, spending ₹600. After 6 months, the stock went up to ₹90. 

Lokesh sold his shares for ₹900. He made a profit of ₹300.

Lokesh’s Investment Summary