Undervaluation

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Undervaluation

The state in which a security's price is lower than it ought to be. A stock may be undervalued, for example, when its earnings and financial outlook are both strong, but its share price is still comparatively low. A number of factors may cause undervaluation, including lack of investor knowledge about the company, which, in turn, leads to low demand for its securities. Value investors seek out undervalued companies because they tend to provide solid returns for lower prices.

Undervaluation.

Any stock that trades at a lower price than the issuing company's reputation, earnings outlook, or financial situation would seem to merit is considered undervalued.

Undervaluation may occur when investors lose interest in a company, perhaps because it hasn't kept pace with its competitors, or if there are management problems.

Some investors concentrate on identifying and investing in undervalued stocks, sometimes called simply value stocks, drawn by their bargain prices and the expectation of recovery.

References in periodicals archive ?
The last two columns of table 7 report results of two-stage panel growth regressions (with, as before, a full set of fixed effects) that test whether the effect of undervaluation on growth operates through its impact on the relative size of industry.
They break the undervaluation-growth relationship into two separate links, one from undervaluation to the size of tradables (that is, industry) and the other from the size of industry to economic growth.
Real undervaluation can then act as a second-best mechanism for spurring growth of tradables and for generating more rapid overall economic growth.
Specifically, the growth impact of undervaluation should be greater in those countries where this "taxation" is greatest, namely, the countries with the weakest institutions.
The positive effect of undervaluation is strongest in the below-average group and virtually nil in the above-average group.
The analytics of how institutional weakness interacts with undervaluation to influence growth will be developed further in the next section.
Undervaluation is in effect a substitute for industrial policy.
The recent findings of Caroline Freund and Martha Pierola are particularly suggestive in this connection: currency undervaluation appears to play a very important role in inducing producers from developing countries to enter new product lines and new markets, and this seems to be the primary mechanism through which they generate export surges.
That is why episodes of undervaluation are strongly associated with more rapid economic growth.
Are my quantitative estimates of the growth effects of undervaluation plausible?
Even though these authors focus on the costs of overvaluation rather than the benefits of undervaluation, their concern with the real exchange rate renders their paper complementary to this one.
Maintaining a real undervaluation requires either higher saving relative to investment or lower expenditure relative to income.