Undervalued stocks are essentially stocks that are selling for a cheaper price than they're actually worth. There is a whole category of investors called "value investors" who specifically focus most of their energies on finding undervalued stocks. For most investors in this group, the basic idea is to buy the stock while the price is a bargain, and then sell it when it reaches a more justifiable price. Some of the most successful investors in the New York Stock Exchange in the US have utilized the value investment strategy, including Warren Buffet.
For many investors, finding undervalued stocks is not the most important factor. Some of them are more focused on buying stocks with the most successful companies, regardless of their current value. According to experts, this can be a safer strategy, because successful companies tend to gradually increase their value over time. In many cases, however, the most profitable stock may not actually be the best company.
When it comes to undervalued stocks, the only thing investors are really concerned about is whether or not the price is a bargain. The company may be a distant third or fourth in its industry, but if the stock is significantly undervalued, they stand to make a profit in the long-term. Sometimes this can be a risky strategy, because companies with lower levels of success are generally more vulnerable to unexpected market changes, but successful value investors generally find a good balance.
The most challenging part for many value investors is figuring out which companies have undervalued stocks and which ones are actually in trouble. Some investors go online and look at a list of stocks that are currently sitting at their lowest price of the past year. Once they have the list, they will generally pick out the stocks they're most interested in and investigate the reasons for the lowered price. Sometimes the reasons for big price drops are justifiable, and sometimes they really aren't. When investors find situations where investors have overreacted to relatively unimportant events, those stocks often make good candidates.
Another way to find a stock's true value is to look at earnings. Companies with good earnings and bad stock prices can potentially make solid investment choices. This is especially true if the earnings are on an upward trajectory. Another way to find this is to use the "earnings per share" metric, which allows someone to quickly compare earnings levels and share prices to find the biggest disparities.