Ashley Jackson

When beginning your investor journey, the biggest challenge can be finding quality and inexpensive companies to purchase. Your aim is to find a stock that will likely increase in price as time goes on, but you want to pay as little as possible when purchasing relative to its value. 

What’s considered a cheap stock?

An “inexpensive stock” can more accurately be labeled an “undervalued” stock. An undervalued company has worthy fundamentals in place, but the market hasn’t caught on yet. Therefore, the current stock price may not reflect the actual value of the company and what it has to offer. Simply put, an undervalued stock offers good value for the money, not just a low share price. 

It can be tricky to find good cheap stocks to buy. A great way to begin your search for these undervalued stocks is by utilizing a stock screener. This service is available through several brokerages, but you can also do your own research. Stock screeners allow you to sort stocks by specific criteria that are the most important to you. Additionally, you can also focus on the candidates that will be useful for further research.

Finding ideal candidates is an ongoing process, as investing in individual stocks can be quite time-consuming. You’ll have to consider the following when analyzing a candidate but not limited to:

  • Gain an understanding of the several types of stocks
  • Research the company and its team members
  • Seek more information about the specific industry
  • Filter the financial information including the balance sheet and income statement
  • Keep an eye on the company’s quarterly reports 

Following these basic steps is just the bare minimum. You can also consider buying an index fund if you do not want to spend your free time looking for cheap stocks. 

How to find cheap stocks

For individuals looking to find cheap stocks, consider the guide below.

1. Choose a stock screener

The first step is to seek out a stock screener. You will find most online stockbrokers, and some financial sites, such as Yahoo Finance stock screener, have them. The great thing about the screener is it allows you to organize your selection by almost any specific characteristic you can imagine. To find the best small-cap stock screener for you, you can have stock screener parameters that will filter traits, so your results project what you’re looking for such as annual sales growth above a specific threshold like10%.

» MORE: Find the best stock brokers

2. Choose a target for earnings growth rate

A company can be defined as good in several ways but the key quality is the rapid pace of growth of the company. On the screener, arrange a screen for a company’s potential future earnings and its growth rate. You could begin at 10% annually over the course of the next five years and then gradually increase it to 15% or 20% and observe what’s available. Earnings growth beyond 20% is considered high.

If the screener does not have a screen to show future earnings growth, try to use a screen for sales growth. Keep in mind that you want to search for companies with growing revenue at your preferred growth rate. If the screener does not show potential for future growth, try to reflect on the earnings and sales growth in the past five years instead. 

NOTE: Future earnings are estimates made by professional analysts.

3. Use the P/E ratio to find prospective undervalued stocks

Now that you have compiled a list of fast-growing companies, why not add another criterion to your screen? You can search for companies that are also cheap relative to their current earnings and price. 

‘Inexpensive’ is in reference to undervalued stocks, and not just stocks that have a low share price. Keep in mind that there are several stocks that offer a low share price but you may be getting exactly what you paid for.

When evaluating a stock’s value, investors will frequently divide the current price of one of its shares by its annual earnings per share. The resulting number is referred to as the price-to-earnings ratio (P/E ratio). The lower the P/E is, the less expensive the company stock is. Furthermore, if you pay a lower price for the earnings, you are getting a better deal given all else is equal.

4. Centre on market capitalization to screen out risky companies 

While using the screener, you will gather dozens of companies that are considered fairly cheap with prospective growth well into the future. If you find you’ve accumulated more companies than you had planned to, set the minimum size of the company, as measured by its market cap, so you can dismiss some of the riskier and smaller stocks. Just keep to note, large-cap companies are close to a value of $10 billion and more. 

If you find your list is becoming quite lengthy, you may want to consider adding more criteria to formulate a specific screener. Consider the following points:

  • Increase the minimum growth rate; ie. change to 15% growth versus 10%.
  • Look out for stocks that are trading near their 52-week low point; this will root out which stocks the market has lost interest in at the moment. 
  • Look into dividend paying stocks as this is often an indication of strong financial performance.

Keep in mind that the screener is just the beginning of your search for good stocks at a bargain value. Moving forward, you will have to do thorough research on the stocks you choose and keep the following questions in mind:

  • What does the company provide? What does the future look like for the industry?
  • If this is such an alluring and high-growth stock, why is it an undervalued growth stock?
  • What is the management team like and is there an association with shareholders?
  • What does the company’s balance sheet and financials look like?

By having your answers prepared to these fundamental questions, you can help create an assorted portfolio for yourself. To stay well-informed with the stocks you have purchased, you will want to analyze the quarterly earnings reports. Also, consider opening an account with a broker that can offer helpful insight into screening and research of stocks as you begin your journey in investing stocks.

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