Ask Colin

How do you determine if a stock is undervalued by the market?

You determine valuation using fundamental analysis. This is a discipline in which various methods are adopted to determine the so-called "intrinsic value" of a stock. It is a very skilled discipline and requires some years of study, just like any other profession.

However, like many things, there are also "quick and dirty" methods that get you in the "ballpark", and are a good starting point from which to select companies to research further.

I do this using my charting software and/or from the Australian Financial Review on Mondays and/or the Shares magazine tables section. Different people will give you somewhat different filter rules, but mine have worked well for me. I look for companies with a PE ratio of 10 or less, and a Dividend yield of 5% or more, and a price to NTA of 2 or less.

You have to remember that this list will contain much rubbish - companies going out backwards. You need to do more research on them to find the "diamonds" among the rubble. Technical analysis can help by pointing to which ones the market is re-rating - their share prices are rising.

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