Undervalued stock

An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value.^[1] 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.

Numerous popular books discuss undervalued stocks. Examples are The Intelligent Investor by Benjamin Graham, also known as "The Dean of Wall Street," and The Warren Buffett Way by Robert Hagstrom. The Intelligent Investor puts forth Graham's principles that are based on mathematical calculations such as the price/earning ratio. 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 Warren Buffett, who later became a famous US billionaire.