77% Of These Penny Stocks Are Undervalued!

China flagSome of the smartest hedge fund guys I know are always looking for the biggest bang for their buck.  That often means looking for deeply discounted and undervalued companies.  But, finding undervalued companies is often easier said than done.

So that brings up an interesting question…  “How do you tell if a stock is undervalued?”

It’s a great question… and a lot of investors are looking for the answer.  It’s the holy grail of investing.  If you find a solid stock trading at a deep discount, you’re certain to have a winner on your hand.

A big winner.

Now, before I share with you one way to find undervalued stocks, let’s dig a little deeper.  Why would a penny stock get so undervalued?  How does a penny stock price get so out of whack?

There are hundreds of reasons a stock may sell at a discount.  The company could have missed numbers or given lower guidance.  Sometimes a stock can be discounted simply because the market doesn’t understand a company’s true potential.  We’ve even seen great companies sell at discounts because the overall market is struggling.

You might also see a stock deeply discounted because industry news is bad.  That could present a lot of opportunity.

Take for example Chinese stocks trading here in the US.

Their stock prices have been obliterated by the market.  Why?  Because there’s fear about investing in all Chinese stocks.  Investors are concerned about the financial numbers, the potential for fraud, or even a slow-down in the Chinese economy.

Because of these fears, a lot of good little Chinese penny stocks have been thrown out.

But within this fear lies opportunity.

A huge number of Chinese companies are dramatically undervalued by the markets.  Some of these valuations are simply ridiculous.

Of course, I did a little research…

Using my favorite stock screening tool, I looked for traditional Chinese penny stocks.    I screened for companies with less than a $2.0 billion market cap a sub $10 share price.

Then I sorted them simply by one simple valuation metric… book value.

So what is book value and why should you use it?

Book value is comparing a company’s assets with their liabilities.  Let me give you an example.  Let’s say you have a company with $25 million in assets and $5 million in debt.  They have a book value of $20 million.

Now let’s take it one step further…

If the stock trades for $4 and they have 10 million shares outstanding, the market cap of the company is $40 million.  The $40 million market cap divided by the $20 million book value gives us a price to book ratio of 2.0x.

Now, if that same company was only worth $10 million… and still had a book value of $20 million, the price to book ratio would be 0.5x.

Typically, a price to book ratio below 1.0x implies the company is dramatically undervalued.

Now let’s take a look at our universe of Chinese companies.  Of the 170 companies that came up in our screen, 131 of them had a price/book ratio below 1.0x!

Think about what this implies.

It means more than 77% of Chinese penny stocks are valued at less than their assets!  It clearly indicates these companies are dirt cheap.

Now, are they all a good deal?  No, of course not.  You have to be very choosey when selecting companies to invest in.  But one way to find deeply discounted stocks is to start by looking at companies with low price to book ratios.

Until next time,

Brian

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Category: Chinese Penny Stocks, Investing in Penny Stocks, Penny Stock Tips

About the Author

Brian joins the Penny Stock Research team as a seasoned independent trader and financial analyst. Brian graduated with a B.S. from the University of North Florida and now resides in Scottsdale, Arizona. With a background in economics and statistics, he has a keen ability to uncover profitable and growth-focused companies. He has years of real life know-how in analyzing fundamental and technical data that gives him an edge drilling down on companies and financial results. With over 15 years trading experience, Brian has become an expert in the ever-changing equities markets. Today, he scours the markets hunting for penny stocks that offer low risk and high reward.

Comments (5)

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  1. Charlotte says:

    awesome blog, do you have twitter or facebook? i will bookmark this page thanks.

  2. Catherine says:

    I couldn’t agree more! I’ve been watching Chinese stocks for a while and it finally looks like this may be a good entry point. I guess time will tell!

  3. Lucky Cogito says:

    ORA.TO Canada price to book value of 0.22, now at 15 cents, book value of 68 cents
    Have you heard of hedging…
    I will give you a hint, 1396$ per ounce in Q4, at least 50,000 ounces , they will announce a good operating cash-flow and a good net profit, last quarter they took a one time charge, without it net profit would have been 8 Millions ,they will be able to repay some of the expiring debt and work-out a deal with the rest as the gold price is going up from here, the bank will have no problem financing ORA. It s time to buy now or watch and cry.

    and.. shares outstanding 246M , book value as per last report is 226M -57 or 59 M in debt so book value as of today is roughly 0.68 cents per share, ( do ur DD, see their filings), and it is only going to improve going forward as the next financials will be very good, they will find all the financing they need as gold price is rising.
    It is the most undervalued stock I could find, cheers.

    • Brian Kent says:

      Hi Lucky,
      thanks for the summary… I tend to ignore what companies “WILL DO” and focus on WHAT THEY’VE DONE!”
      There’s a big difference between results and promises. Regardless we’ll add the company to our stocks to watch list and might review it in the future.

      Regards: BRIAN

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