159:, the Harvard-educated partner of Buffett. An excellent stock continues to rise in value over the long term, while a poor stock declines in value. An undervalued stock will usually have a low PE ratio. For example, a PE ratio of 10 is much better than a PE ratio of 20. Some high-flying Internet stocks had PE ratios of 30, 40, 50, 100, 200 or more in year 2000, prior to the bursting of the Internet stock bubble. Investors of these Internet stocks did not purchase undervalued stocks, as they later learned.
109:. Therefore, one would not be able to predict whether a stock is undervalued without predicting the future profits of a company and future interest rates. Buffett stated that he is interested in predictable businesses and he uses the interest rate on the 10-year treasury bond in his calculations. Therefore, an investor has to be fairly certain that a company will be profitable in the future in order to consider it to be undervalued. For example, if a risky stock has a
55:. He was less concerned with the qualitative aspects of a business such as the nature of a business, its growth potential and its management. For example, Amazon, Facebook, Netflix and Tesla in 2016, although they had a promising future, would not have appealed to Graham, since their price-earnings ratios were too high. Graham's ideas had a significant influence on the young
28:. For example, if a stock is selling for $ 50, but it is worth $ 100 based on predictable future cash flows, then it is an undervalued stock. The undervalued stock has the intrinsic value below the investment's true intrinsic value.
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of 5 and the company becomes bankrupt, this would not be an undervalued stock. Some qualities of companies with undervalued stocks are:
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An excellent stock at a fair price is more likely to be undervalued than is a poor stock at a low price, according to
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The company's credit rating is AAA, AA, or A, or even better, there is no rating because there is no debt at all.
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The company's low PE ratio is not due to profits realized from capital gains.
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