One way is to compare the stock with other stocks.
markets run in cycles. If everyone is currently buying technology stocks,
perhaps they are selling bank stocks.
Bank stocks might be sold off more
than what they should have, which could result in giving the savvy investor
an opportunity to find a good value in a stock (within a sector) that
is currently unloved.
Look at the ratios: If a technology stock and a
bank stock both grow earnings 15% a year, but the technology stock is
trading at a P/E ratio of 30 and the bank stock's P/E is 20, it looks
as if the bank stock is cheaper.
The other way an investor might spot value is to know something about
the company that he doesn't believe is factored into the price.
company coming out with a new "Miracle Product."
ABB company owns real
estate worth several billions that is not reflected properly on the balance
XYZ industry being deregulated promising more mergers and acquisitions.
The advantage to this strategy is usually less volatility and less downside
risk if the markets start to fall. The biggest criticism of value investing
is that it often times doesn't provide instant gratification.
want to see their stock double within weeks of buying it. Value investors
often have to wait for a lot longer than that!