Stock Markets Analysis & Opinion

Here’s How to Hunt for “Undervalued Stocks” in This Correction

The markets have again corrected in Thursday's session with the benchmark Nifty 50 index falling over 220 points, breaking below 21,900, by 10:42 AM IST. Although the very short-term trend seems to be negative, we are ye to see the formation of lower high and lower low on the daily time frame.

For those trying to hunt for undervalued stocks to prepare in advance for a probable reversal, here’s a simple way to start building a portfolio.

We’ll use the InvestingPro+ advanced screener and filter stocks based on the criteria “Fair value > 20%”. This filter will give us a list of stocks that are trading below their average intrinsic value but obviously, we cannot buy every stock out there in the list.

The second step we’ll follow is to look for a financial health score of 3 or above. This tool analyzes over 100 parameters across 5 broad categories and rates them out of 5. The higher the score the better the company is positioned fundamentally.

Image Source: InvestingPro+

For eg. one of the stocks that caught my attention is Ikio Lighting Limited. It manufactures and sells light-emitting diode (LED) lighting solutions in India and has a market capitalization of INR 2,275 crore.

After analyzing it through 12 different financial models, its average intrinsic value (fair value) is coming at INR 363, which is a healthy 27.6% upside from the CMP of INR 284

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Image Source: InvestingPro+

After that, when we look at the financial health score, it is a good 3 out of 5, meaning better than average fundamentals. Once these 2 parameters are satisfied, then we look at ProTips for any red flag that’s concerning.

ProTips gives us a valuable piece of information — the company has been profitable over the last 12 months which is important to know considering the fact it is a very small company. Profitability is an important parameter that separates the wheat from the chaff. It also tells more cash in books than debt which is always a positive sign.

Those having a little knowledge of technical analysis can also look at the charts to better time the entry, however, the stock selection can be done this way which will fetch high-quality and undervalued stocks

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