Cheap stocks are such stocks that are traded at low valuation multiples. For example, if you see a telecom or utility company of which P/E is equal to 6 and EV/EBITDA is equal to 3, you may say it is a cheap stock. Of course there are much more of valuation multiples (also can be called market ratios) and the particular multiples should be chosen accordingly to the sector and the nuances of the company. If correctly selected multiples are much lower than multiples of similar companies in the same niche, it may indicate that company’s stocks might be cheap.
But of course valuation multiples is not yet everything, because company or company’s perspectives might be in trouble. Then naturally it should trade at lower multiples than financially healthy companies. Only the full analysis of financial statements and detailed market research could show if company’s multiples are fairly low and whether the stock is really cheap.
In addition to multiples, DCF valuation also may help to determine whether the stock is cheap. However, experienced investor should concentrate more on finding undervalued stocks than the cheap ones because not everything that is cheap is worth its price.
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