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Dear Penny Stock Millionaire,

I’ve got good news and bad news.

The bad news is that undervalued stocks aren’t necessarily easy to find. Often, these stocks aren’t in the public eye, otherwise they probably wouldn’t be undervalued.

It can also be tricky to identify undervalued stocks because a quick Google search into the company might reveal bad news, which might throw many off the scent of what could be a hot stock in the near future.

Seeking out under the radar companies that may have misleading news makes it a tricky prospect to find undervalued stocks that could/should be trading at a higher price.

The good news is that it’s not impossible to find undervalued penny stocks–it just takes practice, and once you do find an undervalued stock they can be highly lucrative.

There are methods that every trader can do to narrow down the choices for potential undervalued stocks to trade. Follow these steps:

#1 Undervalued Penny Stock Indicators

There are several indicators that can be used to narrow down the choices for undervalued penny stocks, including:

Book Value:

This is the sum total of all of the company’s assets (with liabilities removed) that is divided by the current number of shares outstanding.

If this figure is higher than the current price per share, it could be a sign that the stock is undervalued.

It’s based on the value of the company’s assets, which can help you determine if the company is sound in its finances. However, it’s an imperfect art because you can never know how much a company would fetch for sale or what would happen if it went bankrupt.

P/E Ratio

That’s short for Price-to-Earnings ratio. The P/E Ratio is calculated by taking the price per share and dividing it by the 12 month EPS (short for Earnings Per Share).

For example, say a stock is priced at $2 per share. Now, say the EPS for the year was $0.20. The P/E would be 10, which would be the amount that traders would be willing to pay, dollar for dollar, on earnings.

Simply computing the P/E isn’t enough, though, because this can be relative in different industries. For best results, calculate the P/E ratio and then take it one step further by comparing it to stocks in the same sector.

PEG

Let’s take it one step further with the PEG, or P/E to Growth Ratio. Once you’ve calculated the P/E, you can also divide the P/E number by the expected EPS for the next year.

This can help explain how a stock is valued, which can help you consider potential future growth. If you calculate the PEG at 1, that’s a good baseline to tell you a stock has a fair value; below could be undervalued, above could be overvalued.

#2 News Catalysts

Much of determining whether or not a stock is undervalued is a matter of educated guesswork.

In your research, you’re looking for evidence that can support your theory that the stock is undervalued. One of the most popular and effective ways to support your case is to look at the news surrounding a stock.

When looking at the news surrounding a company, you want to be looking for things that support potential for growth.

Is the company in a sector or field that is currently heating up in the news? For example, right now it’s all about CBD stocks. At the time of this writing, this sector is seen as one of the biggest growth potential.

If the company is part of a trending sector that is getting a lot of news coverage, this could be a good sign, even if the price is low. Even if the stock itself hasn’t moved much in price, simply being part of the trend could move the price in the not too distant future.

Even if the company hasn’t had good news and even if it’s had some bad news in the recent past, it could still be poised for growth.

However, just because a company has growth potential doesn’t mean it will be realized in the near future, or ever, really. It still is something of a roll of the dice but something you need to keep your eye on.

#3 Stock Chart Patterns

I’m all about stock chart patterns.

They’re the foundation of my personal trading style, and reading charts is one of the most important lessons I try to convey to my students.

Things move in cycles in the market, and charts can help you determine what patterns are playing out with the price action of a stock.

When you begin to read stock charts, chances are you’ll start to notice patterns emerging. You should learn how to identify common ones like the ‘head and shoulders’ pattern or ‘supernovas’.

Once you begin to understand the nature of these patterns and anticipate them, you can use this knowledge to inform your trades.

With undervalued penny stocks, looking at the chart is of paramount importance because it can tell you things that the news and fundamentals might not be able to.

If you see that the price is breaking new highs or lows and following a repeating pattern, you can begin to anticipate the price action moving forward and plot out intelligent entry and exit points.

#4 Trading Plan

Once you’ve figured out a few potential stocks that you think may be undervalued, it’s time to roll up your sleeves and work up some trading plans.

A trading plan is just what it sounds like: a written plan that you intend to follow if and when you execute a trade.

While there isn’t just one format to follow for a trading plan, a good one will include things like why you’ve decided to make the trade, why the stock in question is worthwhile, and what you specifically hope to gain.

You also plot out your entry and exit points, which are so important for making trades to ensure that you maximize potential profits and minimize potential losses.

Your trading plan should expect the best but be prepared for the worst, meaning you must have pre determined stop loss (whether mental or real).

Having a trading plan at the ready will help you be prepared and as unemotional as possible as you enter a trade.

When it’s written down physically (ether on a document or on paper) you’re more likely to follow your own rules and avoid getting headstrong and trying to force a trade to happen.

A trading plan can help you tailor trades to your style, helps you consider potential outcomes, and helps you remain tactical during the trade. All of these are things that separate the pros from the amateurs. Which camp do you want to be in?

Put another way, without a trading plan, you’re basically gambling. Is that what you want to do with your hard earned money?

#5 Stock Screener

You could think of a stock screener like a kitchen strainer. But instead of straining pasta from the water you cooked it in, you’re straining the most promising stocks and leaving the rest.

A good stock screener lets you screen stocks based on various criteria you’ve set up.

A stock screener can help you separate the stocks that meet your criteria (for example within a specific P/E ratio range, within a particular market cap size, etc) so that you can focus on the ones that are most relevant to your plans and theories.

Your stock screener doesn’t do all of the work for you, but it can help you create a strong watchlist of stocks so that you can focus on the most promising ones and create trading plans so that you will be prepared when the time is right.

I use a stock screener every single day, not only to find stocks to trade but to monitor stocks that are already on my radar.

Staying up to date on the most recent information with a stock via the screener can alert you to changes that could affect whether or not you should make a trade and help you remain on top of your existing positions.

The Bottom Line

There is no hard and fast method to find undervalued stocks. It takes practice to be able to sort through misleading news catalysts, do the technical analysis and identify the patterns that indicate a stock is going to explode.

But just because something is difficult doesn’t mean you can’t do it. Like I always say, you have to keep learning. Warren Buffet is living proof that value investing works, you just have to be dedicated to reading and finding the signs that indicate a good investment.

Once you get the hang of value investing, it will take your trading to the next level.

Regards,

Tim Sykes
Editor, Penny Stock Millionaires

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Timothy Sykes

Tim Sykes is the editor of Tim Sykes’ Weekly Fortunes, a bi-weekly penny stock trader.

He also writes the free daily e-letter, Tim Sykes’ Penny Stock Millionaires

Tim’s most famous for turning the $12,415 dollars he received at his Bar Mitzvah into more than $1.65 million dollars in trading profits by college graduation.

In 2003,...

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