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Why is a Stock Undervalued?

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Why is a Stock Undervalued?

Undervalued stocks exist in the stock market and can be a great opportunity to make higher returns. Understanding why and knowing how to spot undervalued stocks are the keys to capturing these returns. Read on to learn how you can capitalize on undervalued stocks and to understand why these mispricings can occur. 

Why is a Stock Undervalued?

A stock can be undervalued for a number of reasons, and the answer to why it happens isn’t always clear cut. Understanding the different scenarios that can cause stocks to be undervalued will help you to better identify them. 

  1. Overall Poor Market Conditions

Poor economic and market conditions can be a common factor as to why stocks are undervalued. Deteriorating economic conditions have an overall negative effect on the stock market as well. 

As economic conditions worsen, uncertainty and pessimism rise, making investors more likely to pull out of their current market conditions. When large volumes of a stock are sold, it causes stock prices to decrease. The drop is not necessarily because the value of that company is actually decreasing but because of the relationship between volume and share prices. When economic conditions worsen, it may be an opportunity for investors to find mispriced and undervalued stocks which they will be able to purchase at a discount.

  1. Underdogs 

Sometimes a lesser-known company shows strong growth in revenue, sales, and other key financial metrics, but its stock price seems to stay stagnant. While fundamentally the company is strong, it can be overlooked by investors because it might be newer, have lower brand recognition or is yet to be discovered. 

For this reason, its share price remains lower than what it should be given the demonstrated growth. Companies like this can be the perfect opportunity for value investors to buy in at a cheaper price, as the stock price has the ultimate potential to catch up to the actual intrinsic value of the company. 

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  1. Cyclical Companies 

Companies in certain industries or with certain business models are cyclical since their sales and revenues occur in a cycle and certain metrics are stronger during certain parts of the cycle. Examples of cyclical industries include luxury goods and airlines. Generally, the revenues of cyclical companies will be higher during times of economic growth and prosperity and will suffer during economic contraction. 

Stocks of cyclical companies may be undervalued from worsening economic conditions rather than their actual intrinsic value decreasing. This situation can be good as it presents a buying opportunity for investors who are willing to ride the cycle and wait for the share prices to go up when economic conditions get better. Rather than the stocks being undervalued because the value of the firm is worsening, cyclical companies’ stocks will move based on consumer demand. 

  1. Bad Press

Another common reason for a stock to become undervalued is from bad press. When negative reports about a company are published, it can instill fear and pessimistic thoughts in an investor’s head, causing them to sell their position in a company. When enough investors let bad press get to them and they sell their holdings, it can negatively impact stock prices. 

Depending on what the bad press was, typically stock prices will bounce back. Bad media coverage usually affect share prices in the short term and isn’t an indication of complete downfall. As an investor, you will need to assess the situation and determine if you believe the company is strong enough to overcome the crisis or not. If you believe that the company can overcome whatever bad news was released, then that would present an opportunity for you to invest at a cheaper price.

What is Value Investing?

Value investing is a strategy famed by the iconic investor Warren Buffett. This strategy focuses on identifying stocks that are trading for less than what the intrinsic value says they should be traded for. By investing in quality stocks that you believe the market is underestimating, there is large potential for them to grow and provide solid returns. 

This investment strategy focuses on the long term and is more of a passive investment strategy. Value investors rely on financial analysis to determine what the true intrinsic value of a company is to determine whether the market is underestimating that stock or not. 

Should You Buy an Undervalued Stock?

Undervalued stocks hold the potential to yield solid returns, given that an investor has properly analyzed the factors causing that stock to not be accurately priced. For example, if a stock is undervalued from bad press or a bad quarter but the intrinsic value of the underlying business says the stock price is undervalued, it could be a good investment to make. On the other hand, if you believe a stock is undervalued because of internal problems within the firm, chances are that stock does not have good potential for growth and is not a good investment.

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Are Undervalued Stocks Volatile?

Volatility and underestimated stock prices aren’t distinctly correlated. However, oftentimes, both undervalued stocks and highly volatile stocks are associated with companies that investors believe to be in trouble. 

For example, when a company faces uncertainty about its future, its volatility will probably increase. This happens because investors are not able to wholly determine whether or not to invest in that security. Furthermore, when stocks are undervalued, the market’s perception of a security is not accurately reflecting the true book value of that firm. This factor may indicate that investors are pessimistic about that company.

Frequently Asked Questions

Is it good if a stock is undervalued?

As an investor looking to buy, it can be good if a stock is undervalued as it allows them to buy in at a cheaper price with room for potential growth.

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How do you know if a stock is undervalued?

By finding the intrinsic value of a company and then dividing it by the number of outstanding shares, you will be able to determine the correct pricing of a stock. If your valuation says the stock price is above what it is currently trading for on the market, that means the stock is undervalued.

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$450 Million

Binance CEO Says Exchange Recovered $450 Million From The Curve Finance Attack

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Binance CEO Says Exchange Recovered $450 Million From The Curve Finance Attack

Following the recent Curve Finance attack, Binance CEO Changpeng Zhao announced that the exchange had recovered $450 million from hackers. The decentralized finance (defi) platform Curve saw roughly $570 million siphoned from the application on August 9.

Binance Boss Says Exchange Froze 83% of the Curve Finance Hack Funds, Domain Provider Says Exploit Was DNS Cache Poisoning

Four days ago, the crypto community was made aware that the Curve Finance front end was exploited. Curve fixed the situation but $570 million was removed from the defi protocol. The attackers, however, decided to send the funds to crypto exchanges. Binance CEO Changpeng Zhao (CZ) tweeted about the exploit the day it happened.

“Curve Finance had their DNS hijacked in the past hour,” CZ wrote. “Hacker put a malicious contract on the home page. When the victim approved the contract, it would drain the wallet. Damage is around $570K so far. We are monitoring.” In addition to Binance monitoring the situation, the exchange Fixedfloat managed to freeze some funds.

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“Our security department has frozen part of the funds in the amount of 112 [ether]. In order for our security department to be able to sort out what happened as soon as possible, please email us,” Fixedfloat wrote the day of the hack. Then three days after the hack, on August 12, CZ explained at 1:07 a.m. (EST) that Binance recovered roughly 83% of the funds.

“Binance froze/recovered $450K of the Curve stolen funds, representing 83%+ of the hack,” CZ tweeted on Friday. “We are working with [law enforcement] to return the funds to the users. The hacker kept on sending the funds to Binance in different ways, thinking we can’t catch it,” CZ added.

Curve Finance retweeted CZ’s statement and noted earlier in the day that the team has a brief report from the domain provider [iwantmyname.com] and said: “In brief: DNS cache poisoning, not nameserver compromise,” Curve Finance explained while sharing the report. “No one on the web is 100% safe from these attacks. What has happened STRONGLY suggests to start moving to ENS instead of DNS.”

The domain provider iwantmyname.com’s report confirms Curve’s statements. “It appears that one customer’s domain was targeted,” iwantmyname.com’s disclosure report details. “Our external provider’s hosted DNS infrastructure was apparently compromised and the DNS records for this domain were changed to point to a cloned web server. Further investigation together with the external provider indicates that it was DNS Cache poisoning rather than any nameservers compromised.”

Tags in this story

$450 Million, $570K, Binance, Binance CEO, Changpeng Zhao, Curve, Curve fi frontend, Curve.finance, CZ, DeFi, Defi exploit, DNS Cache poisoning, ETH, Ethereum, Ethereum (ETH), Fixedfloat, Funds, Hack, hacker’s funds, iwantmyname.com, USDC, USDC funds

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What do you think about Binance recovering $450 million from the Curve Finance hack? Let us know what you think about this subject in the comments section below.

Jamie Redman

Jamie Redman is the News Lead at Bitcoin.com News and a financial tech journalist living in Florida. Redman has been an active member of the cryptocurrency community since 2011. He has a passion for Bitcoin, open-source code, and decentralized applications. Since September 2015, Redman has written more than 5,700 articles for Bitcoin.com News about the disruptive protocols emerging today.

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Image Credits: Shutterstock, Pixabay, Wiki Commons

Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

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Analysis

Biggest Movers: MATIC, SOL Move Towards 4-Month Highs On Saturday

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Biggest Movers: MATIC, SOL Move Towards 4-Month Highs On Saturday

Polygon rallied to its highest point in nearly four months on Saturday, as the token climbed to the $1.00 mark to start the weekend. Solana was also trading at a multi-month high, as it rose by over 10% earlier in today’s session. As of writing, the global crypto market cap is trading nearly 3% higher.

Polygon (MATIC)

Polygon (MATIC) was a notable gainer on Saturday, as the token rose to its highest point since May.

Less than 24 hours after trading at a low of $0.9141, MATIC/USD climbed to a peak of $1.02 to start the weekend.

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This is the strongest point that the token has traded at since May 7, and comes after prices rallied past a key resistance level.

MATIC/USD – Daily Chart

Looking at the chart, this resistance was at the $0.9500 region, which was last breached on July 31. However, the move eventually turned into a false breakout.

As of writing, another resistance level was hit, with the 14-day relative strength index (RSI) now tracking at a ceiling of its own.

This is the 66 point on the index, which has been in place since July 17, when the RSI moved to a high above the 80 level.

Following earlier highs, MATIC is once again trading below $1.00, as bulls retreated from their previous positions.

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Solana (SOL)

In addition to MATIC, solana (SOL) was another big mover in today’s session, with it also climbing to its highest point since May.

SOL/USD raced to an intraday high of $48.18 to start the weekend’s session, as bulls attempted to recapture the $50.00 point.

The move sees solana hit its highest point since May 25, and comes as the 10-day (red) moving average (MA), crossed above the 25-day (blue) MA.

SOL/USD – Daily Chart

This is the first time since mid-July that such a cross has occurred, with prices rising from a floor of $32, to a ceiling of $47 on that occasion.

In addition to this, the 14-day RSI has also broken its ceiling, surging above the 59.20 resistance for the first time since July 18.

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Can solana hit $50.00 in August? Let us know your thoughts in the comments.

Eliman Dambell

Eliman brings a eclectic point of view to market analysis, having worked as a brokerage director, retail trading educator, and market commentator in Crypto, Stocks and FX.

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Image Credits: Shutterstock, Pixabay, Wiki Commons

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Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

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Analysis

Bitcoin, Ethereum Technical Analysis: ETH Hits $2,000 For First Time Since May

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Bitcoin, Ethereum Technical Analysis: ETH Hits $2,000 For First Time Since May

Ethereum was trading above $2,000 to start the weekend, as the token hit its highest point since May. Crypto markets were back in the green, after marginally consolidating in Friday’s session. Bitcoin moved closer to $25,000 on Saturday, however has still yet to breach this ceiling.

Bitcoin

Bitcoin (BTC) was marginally higher on Saturday, as the token once again attempted to climb above the $25,000 level.

Following a low of $23,657.27 on Friday, BTC/USD hit an intraday high of $24,860.05 to start the weekend.

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The move saw bitcoin briefly break out of its resistance level of $24,600, and near a two-month high above $24,900 in the process.

BTC/USD – Daily Chart

Looking at the chart, today’s gains come as the 14-day relative strength index (RSI) finally broke out of its long-term resistance point at the 60.32 level.

As of writing, the index is currently tracking at 61.60, which is slightly below another point of uncertainty, at 61.80.

Overall, earlier gains have somewhat eased, with BTC currently trading at $24,407.29, as bulls seemed to have abandoned previous positions in order to secure profits.

Ethereum

Whilst BTC was struggling to break out of a key point at $25,000, ethereum (ETH) raced past its own ceiling in today’s session.

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On Saturday, prices of the world’s second-largest token moved above $2,000 for the first time since May.

Following a low of $1,868.42 on Friday, ETH/USD moved to a peak of $2,013.76 earlier in today’s session.

ETH/USD – Daily Chart

This is the highest point ethereum has traded at since May 23, and comes as price strength also surged past a ceiling of its own.

Looking at the chart, the RSI also raced past its resistance level at 68, and is currently tracking at 71.55, which is its strongest reading since April 4.

As of writing, ethereum is now overbought, which could see bears gradually look to position themselves for entries back into the market.

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Will ethereum climb to further highs this weekend? Leave your thoughts in the comments below.

Eliman Dambell

Eliman brings a eclectic point of view to market analysis, having worked as a brokerage director, retail trading educator, and market commentator in Crypto, Stocks and FX.

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Image Credits: Shutterstock, Pixabay, Wiki Commons

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Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

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