Cherry Picking The Diamonds From The Stock Market

How do you value a stock, to know whether its overvalued or undervalued?


There are many ways to do it, so you’re not going to get a comprehensive lesson here. Entire books are written on this subject.

In short, two of the most common are price/earnings ratio and price/sales ratio. Compare the P/E to projected growth in earnings and P/S to projected growth in sales. (Some people like sales better because accountants can manipulate earnings figures. Sales are harder to "cook".)

You can also compare the ratios and growth rates for an individual company to those of competitors companies in the same industry. That will give an indication of how a company is valued relative to its peers.