Undervalued Stock: Meaning and Example

An undervalued stock is a stock trading below what an investor or analyst believes is its intrinsic value. The idea depends on a valuation model rather than on a universally observable fact.

How It Works

A stock may look undervalued because the market is underestimating earnings power, asset value, recovery potential, or long-term growth. The opportunity exists only if the analyst’s intrinsic-value estimate is sound and the market eventually closes the gap.

Worked Example

If an analyst estimates a stock’s intrinsic value at $50 per share and the market price is $38, the analyst may call the stock undervalued.

Scenario Question

An investor says, “If a stock is undervalued, it is automatically safe.”

Answer: No. A stock can be cheap for a valid reason, including deteriorating fundamentals.

Related Terms

• Intrinsic Value: Undervaluation is always judged relative to an intrinsic-value estimate.
• Value Stock: Many value stocks are purchased because investors believe they are undervalued.
• Overvalued Stock: Overvalued stock is the opposite judgment.