Fair Value Stocks and How to Identify Them
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A fair-valued stock is one where the market price closely matches its intrinsic value. There are several indicators you can use to conduct fundamental analysis on a stock. This helps investors identify whether a stock counter is fairly priced.
The key indicators are PE ratio and PB ratio.
The value of a fair-valued stock is subjective. A fair-valued share price is considered to have limited upside potential, as it already reflects the true value of the company.
Relative
Relative return refers to the comparison between the returns of similar investments or performance measured against the FBM KLCI benchmark.
After measuring the investment return, you can make a decision to buy or sell the stock.
PE Ratio
The Price-to-Earnings ratio (PER) compares a stock''s market price to its earnings value.
If the PER indicates that the stock''s intrinsic value is greater than the market price, the stock is in an undervalued (cheap) position.
If the intrinsic value equals the market price, the stock is fair-valued.
If the intrinsic value is less than the market price, the stock is overvalued (expensive).
For example, a PE ratio below 15 or between 10-15 indicates better value for buying compared to a PE ratio of 80-100. However, the PE ratio depends on the type of counter listed on Bursa Malaysia.
The PE ratio shows lagging data, meaning the PE ratio is based on projected figures derived from previous PE ratio values.
PB Ratio
The PB ratio is a fundamental analysis metric for a company.
If PB ratio < 1, the stock is undervalued.
If PB ratio > 1, the stock is overvalued.
Additionally, a PB ratio can appear undervalued when the company holds many assets that it is unable to sell.
Absolute return refers to the return on an asset over a specific period, aimed at growing the portfolio without depending on long-lasting market trends. An example is the Discounted Cash Flow (DCF) Model.
A fair-valued stock is one where the market price is approximately equal to the company''s true or intrinsic value. This means the stock is neither too expensive nor too cheap compared to its fundamental value.
You can use several methods such as Price-to-Earnings (PE) ratio, Price-to-Book (PB) ratio, and Discounted Cash Flow (DCF) Model to assess whether a stock is at fair value.
An undervalued stock is priced below its true value, an overvalued stock is priced above its true value, while a fair-valued stock is priced approximately at its intrinsic value. Smart investors need to understand all three concepts.
Yes, fair-valued stocks can be a good choice for long-term investment as they reflect the company''s true value. However, investors should conduct thorough fundamental analysis before making a decision.
Interested in starting your stock investment journey? Open a CDS account with Mahersaham today and begin your investment journey. Also download our free stock ebook for a beginner''s guide to stock investing.