Opportunities to invest in undervalued Singapore stocks listed on SGX usually appear when there is a specific event that puts the share price under pressure. But most people make the mistake of buying cheap stocks, especially during a bear market.
Setting Expectations on undervalued stocks
The stock market has been around before we were born. If there are any stocks with deep discount, the efficient market hypothesis would have taken care of it. If the hypothesis remains an academia fallacy, you can be sure there are tons of companies that have research teams scouring for stocks that are at bargain prices in Singapore.
So what I'm trying to say is don't be naive and think buying any undervalued stock is a sure fire way to profit in the stock market. Some stocks may stay cheap longer than you can wait, or worse it may become cheaper.
If you manage to find an undervalued Singapore stock, the bargain price merely constitute an opportunity.
When is an undervalued stock an opportunity
Conventional wisdom on a stock being undervalued by taking current price being lower than some financial ratio (e.g. net asset value) may not present a good enough opportunity. It's the circumstances behind the discount that can determine whether there's a good opportunity.
Let's look at an example.
1) Company O share price fell 30% from the time accusations were made on its accounting irregularities. The company fiercely deny the allegations at first but later took actions to remedy its financial position, thereby implying the allegations are not without substance.
2) Company U share price fell 30% following an announcement to raise capital by issuing more shares to finance a takeover of an asset rich company.
Both companies are now trading at a discount to their net asset value. Which stock presents a better opportunity? For company O, the integrity of the management is in question. For company U, the new investment is likely to contribute to its future earnings.
Which company will you choose to invest in?
How to find undervalued stocks in Singapore
I have always encourage my clients to put in the time to do research on their own. You can look for bargain stocks by going through the financial statements of the companies posted on the Singapore Stock Exchange website. In this way, you will learn a lot more about investing than depending on others.
But if you can't spare the time or not confident enough to constantly search for these opportunities, following my common cents uncommon value stock picks may help.