Undervalued stocks are the best stocks to buy. The advantage is that because the stocks are quoting at a low valuation, the risk of a downside is low. The low price of the stock means that the investing public does not have much expectation from the stock. This means the risk of a disappointment is low.
If an investor or trader buys an undervalued stock, there is a good chance that he may get a multibagger stock if they get re-rated and the stock quotes at higher valuations.
How to find undervalued stocks?
The valuation of a stock which an investor or trader is proposing to buy depends on its earnings per share (EPS) or the book value.
The investor or trader has to compute the P/E (Price to Earnings) ratio or the P/BV (Price to Book Value) ratio of the stock to buy with the P/E ratio and P/BV of the other stocks in the same sector as the stock which has been short-listed as a buy candidate.
This provides a rough and ready guide whether the stock is at cheap valuations and is a good buy or whether it is expensive.
Wealth Creation Stock Ideas
Ashish Maheshwari of Blue Ocean has identified two undervalued stocks which are ripe for a buy now. Both stocks are wealth creation ideas and can become multibaggers. Both companies have come out with excellent Q1 numbers.
Gujarat Heavy Chemicals Limited (GHCL):
GHCL reported a profit of almost Rs 103 crore in Q1FY17 vis-a-vis Rs 62 crore in Q1FY16. It has caustic soda manufacturing and textile divisions. Both divisions are working almost at 90% plus capacity.
GHCL has benefitted because one of the world’s largest caustic soda ash manufacture plant in China has been shut for almost six months. Caustic soda prices are at a new high at present. GHCL will make good money on it 7.5 lakh thousand tonne capacity.
GHCL’s textile division is also working at almost 100% capacity on back of good demand. GHCL is expected to report an EPS of almost Rs 35 to Rs 40.
The stock is cheap and the future looks quite promising. The target price in next six months is Rs 400.
Sybly Industries is a smallcap thread manufacturer. It is a niche player in thread manufacturing and embroidery thread making.
Sybly Industries reported excellent numbers in Q1FY17. The profit shot up from Rs 1.7 lakh which was reported in previous quarter to almost Rs 98.7 lakh in Q1FY17.
Sybly Industries has doubled its capacity from 10,000 spindles to 20, 000 spindles via contract manufacturing. It has also launched new brands.
Sybly Industries is also considering a demerger of its businesses. So this company which is a niche thread making company which is having high profitability margin will be in this listed company.
Sybly is expected to report an EPS of almost Re 1. It is available at 10-12 P/E ratio FY17. If the margins improve and there is capacity addition along with demerger, the stock can give 100% gain in the next six months.