{"id":32676,"date":"2019-06-18T08:30:43","date_gmt":"2019-06-18T00:30:43","guid":{"rendered":"https:\/\/www.imoney.my\/articles\/?p=32676"},"modified":"2021-08-27T18:24:38","modified_gmt":"2021-08-27T10:24:38","slug":"undervalued-stocks-malaysia","status":"publish","type":"post","link":"https:\/\/www.imoney.my\/articles\/undervalued-stocks-malaysia","title":{"rendered":"5 Undervalued Malaysian Stocks To Watch Out For In 2019"},"content":{"rendered":"

Warren Buffet once said: \u201cDo not depend on a single income. Invest and create a second\/third source of income\u201d. His advice suggests that savings alone aren\u2019t enough to keep your finances secure. Instead, one of the best ways to make your money work harder is through investing.<\/p>\n

The number of investors entering the market has been on the rise, especially for account holders aged 25 years and below. This age group has seen a 50.9% increase<\/a> in the number of new Central Depository System (CDS) accounts from 2015 to 2017.<\/p>\n

However, the majority of CDS account holders in Malaysia are those between the ages of 46 and 55<\/a> years, which means despite efforts being made to educate younger generations on the benefits of investing, very few know how or even where to start. It also points to the fact that many of the younger generation feel that they cannot afford to invest yet.<\/p>\n

If you\u2019re new to investing, it can be challenging to figure out where to start and what sort of stocks to look out for. But if there\u2019s another lesson to take from Buffet, it\u2019s that buying stocks that are undervalued is a key component to his value investing strategy.<\/p>\n

<\/span>What are undervalued stocks?<\/strong><\/span><\/h2>\n

An undervalued stock is one that is selling at a discounted price, relative to its \u2018intrinsic value\u2019. Looking for undervalued stocks is part of a strategy called value investing. Value investors look for undervalued stocks in the hopes that they will eventually rise to reflect their intrinsic value.<\/p>\n

<\/span>How to find undervalued stocks<\/strong><\/span><\/h2>\n

The challenge is figuring out which stock is undervalued. Value investors typically look at a company\u2019s financial statements and analyse its fundamentals, such as cash flow, return on assets, profit retention and capital management, to determine its stock\u2019s intrinsic value. However, different investors have different valuation methodologies to calculate intrinsic value.<\/p>\n

Nevertheless, there are a few key indicators you can use to determine if a stock is undervalued:<\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t
Valuation<\/strong><\/th>Best Used For<\/th>Calculation<\/th>\n<\/tr>\n<\/thead>\n
Price-to-earnings (P\/E)<\/strong><\/td>Determining if a stock is undervalued<\/td>P\/E = share price \u00f7 earnings per share (EPS)<\/td>\n<\/tr>\n
Price-to-book (P\/B)<\/strong><\/td>Valuating asset-based companies such as banking or property stocks<\/td>P\/BV = share price \u00f7 book value per share<\/td>\n<\/tr>\n
Price-to-earnings growth (PEG)<\/strong><\/td>Assessing a company's growth<\/td>Price earnings growth = price-to-earnings (P\/E) \u00f7 growth rate<\/td>\n<\/tr>\n
Return on equity (ROE)<\/strong><\/td>Measuring how effectively a company is using its assets to generate profits<\/td>Return on equity = net income \u00f7 average Shareholders\u2019 equity<\/td>\n<\/tr>\n
Dividend yield<\/strong><\/td>Determining how much a company pays out in dividends<\/td>Dividend yield = annual dividend \u00f7 current stock price<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

a) Price-to-earnings (P\/E) ratio<\/strong><\/p>\n

Out of these valuations, the most commonly used to figure out if a stock is undervalued is the P\/E ratio. Price over earnings is used to indicate how far the stock price is compared to its earnings. For example, a P\/E of five\u00a0\u00a0\u00a0\u00a0 \u00a0means that the stock price is 5x times the company earnings, which means an investor will likely break even after 5 years given the same earning every year. Generally, a stock is considered undervalued if its P\/E is below 15.<\/p>\n

b) Price-to-book (P\/B) ratio<\/strong><\/p>\n

The P\/B ratio compares a company’s market capitalisation to its book value. In other words, this ratio shows you how much investors are paying for each dollar of the business\u2019s net assets.<\/p>\n

Typically, a P\/B ratio of under one indicates an undervalued stock, although some value investors also consider<\/a> stocks with a value of under three.<\/p>\n

c) Price-to-earnings growth (PEG)<\/strong><\/p>\n

The PEG ratio builds on the PE ratio by factoring in the expected earnings growth. A PEG ratio of less than one is considered to indicate an undervalued stock, while a PEG ratio of more than one could mean that the stock is overvalued.<\/p>\n

\u00a0<\/strong>d) Return on equity (ROE)<\/strong><\/p>\n

The ROE is a measure of how effectively a company is using its assets to generate profits. A higher ROE denotes higher efficiency.<\/p>\n

\u00a0<\/strong>e) Dividend yield<\/strong><\/p>\n

While a stock\u2019s dividend yield is less commonly used to screen out undervalued stocks, it\u2019s nonetheless a useful metric. A stock with a high dividend yield can be due to a drop in share price, thereby pushing yield rates up \u2013 this drop in prices can indicate<\/a> potential undervalue.<\/p>\n

Having regular dividends can also be useful to a value investor, as it provides consistent income while the investor waits for the stock to move up in price.<\/p>\n

A high dividend yield isn\u2019t always a good thing, however. If a company does not have a consistent history of earnings, or has just taken on huge debt, it could have trouble sustaining its dividend yield. It could also indicate that a company is not reinvesting enough cash to grow the business, but instead paying it out to investors.<\/p>\n

Although these metrics help us consider if a stock is undervalued or not, it is by no means the only way to determine whether a stock is worth the investment. It\u2019s also important for investors to understand the company\u2019s nature of business, its business prospects as well as the impact from current economic conditions before making an investment decision.<\/div><\/div>\n

<\/span>5 potentially undervalued stocks in Malaysia<\/strong><\/span><\/h2>\n

Jerry Lee, a research analyst from iFAST Capital Sdn Bhd, suggests comparing the current P\/E ratio of the market against the fair P\/E ratio assigned to the particular market. Both earnings growth and dividend yield also play important roles in determining the level of attractiveness of a market.<\/p>\n

Ian Tai, the founder of BursaKing, says his way of defining if a stock is undervalued is if their P\/E is below 10 and it gives a dividend of around 6% and above.<\/p>\n

Taking into consideration both suggestions, we\u2019ve screened out a few stocks based on these metrics:<\/p>\n