Undervalued

The term “undervalued” refers to the securities whose prices are lower than true intrinsic value that is based on the analysis of the company's activities and the direct competitors — enterprises operating in the same industry and in the same country. The intrinsic value of a company is estimated from its future cash flows, ability to grow, and risk. The difficulty in choosing undervalued stocks lies in determining their true value. It can be done by considering financial statements of an organization and analyzing its key financial indicators. 

On the other hand, the market value of overvalued shares exceeds the price corresponding to the fundamental indicators of the issuer. The well-known investor Warren Buffett claimed that the best way to invest is to buy an undervalued security, wait for the price to rise and then sell it at a higher price.

Undervalued explained

The problem with this investment idea is that even after you find a growing company whose stocks are traded at an attractive price, there are no guarantees that the business will be able to maintain its growth rates. Besides, there is no exact way to define a true stock price.  When someone claims that the value of a stock is below the fair value estimate, it means that the price of the security can be higher than the current market price. But this statement is based more on personal opinion rather than on facts. 

It is believed that current financial indicators of the company affect the stock price. If the  market value of a share is well below the industry average, it may receive the undervalued designation. Buying undervalued shares is a great opportunity for investors to generate profit in the future, when there’s an increase in demand. 

Value investing

Value investing is the process of purchasing stocks that are traded at a price below their intrinsic value. Value investing is mainly associated with obtaining maximum profit at minimum cost. Besides, high-quality stocks trading at overvalued price levels because of the fear of loss are also avoided in value investing.

Problem of Undervaluation

Experts claim that the concept of an undervalued stock is more or less subjective and the idea that an investor can gain higher returns on such investments defies the fact that prices in the stock market reflect all available information. If a company's stock was below management's best estimate of value, all traders would prefer purchasing the stock and this would lead to an increase in its intrinsic value. 

Truly undervalued stocks can be found only in inefficient markets. And if the stock seems to be undervalued for an investor, then he may know the true reason for this. 

Idea of values-based investing

Values-based investing is an investment style that highlights the personal values of an investor. This approach differs from value investing, where an investor searches out and snaps up undervalued assets. Here individuals invest their money in companies that match their preferences and beliefs, even if it is not confirmed by market indicators. 

For instance, an investor might choose to exclude the alcohol industry from the portfolio as he is strongly against it, and start investing in oil stocks. The product and sector that align with core values guides an investor's decisions.