5 Best Undervalued Stocks for Long Term Tips Every Investor Needs
The best undervalued stocks for long term combine two requirements that rarely overlap: genuine business quality and a price that offers a margin of safety relative to intrinsic value. A cheap stock without quality is a value trap. A quality stock without a discount is an expensive stock. The intersection is where long-term value investing produces its best results. These five tips and the methodology behind them address how to find that intersection systematically.
Key Takeaways
- EBITDA and earnings yield (inverse of P/E) are the starting points for identifying undervalued stocks. A company with a 7% earnings yield (P/E of 14) in a 4.5% rate environment offers a meaningful premium over risk-free assets.
- Penny stocks are not undervalued stocks. A penny stock is a low-priced share in a company with minimal earnings, limited business history, and high bankruptcy risk. Undervaluation requires a quality business temporarily mispriced, not a speculative company with an ambiguous future.
- EPS in stocks (earnings per share) is the denominator in P/E calculations. EPS growth consistency over 5-10 years is the most reliable indicator that the earnings base is sustainable and growing rather than volatile and unreliable.
- The best stocks to buy right now in a value framework are those where the current P/E is below the company's 10-year average P/E without a corresponding decline in business quality or growth trajectory.
- What are penny stocks? They are shares trading below $5, typically in companies with market caps below $300 million. Confusing penny stocks with undervalued stocks is one of the most common errors new value investors make.
- The VMCI Score's Value pillar (35% of the composite) screens for earnings yield, free cash flow yield, and P/B multiples simultaneously. Combined with the Quality pillar (30%), it identifies businesses that are both cheap and financially sound.
Tip 1: Define Undervalued Correctly
Undervalued means the current market price is below the intrinsic value of the business. Intrinsic value is the present value of all future cash flows the business will generate, discounted at an appropriate rate. A company trading at P/E 14 is not automatically undervalued. If the business is declining, P/E 14 might overvalue it relative to the deteriorating earnings trajectory.
Genuine undervaluation requires: (1) a business generating predictable free cash flow; (2) a current price below the DCF-derived value; and (3) a specific reason the market has discounted the stock that is temporary rather than structural.
Tip 2: Use EPS Growth Consistency as a Quality Filter
EPS in stocks is the metric that drives long-term value compounding. Consistent EPS growth of 8-12% per year over 10 years indicates a business with structural competitive advantages. Before labeling any stock as one of the best undervalued stocks for long term, verify the EPS growth pattern: has it been consistent, or has it been propped up by one exceptional year?
A company growing EPS from $2.00 to $4.00 over 10 years (a CAGR of 7.2%) is fundamentally different from one that earned $2.00 in year 1, $1.50 in years 3-6 (declining), and $4.00 in year 10 due to a one-time event. The 10-year CAGR looks the same; the business quality is completely different.
Tip 3: Separate Undervalued From Cheap
| Category | P/E | Business Quality | Verdict |
|---|---|---|---|
| Genuine undervalued | Below historical avg | High (ROE 15%+, consistent EPS growth) | Target for long-term value |
| Fairly valued quality | At historical avg | High | Hold, not a buy at full price |
| Value trap | Below historical avg | Declining (ROE falling, EPS shrinking) | Avoid despite low P/E |
| Penny stock | N/A (often no earnings) | Minimal | Not relevant to value investing |
| Overvalued | Above historical avg | High | Quality stock but too expensive |
The value trap row is where most investors lose money. A stock that was great at P/E 20 but now trades at P/E 10 because its earnings have been declining looks cheap in absolute terms. The P/E is low because earnings are falling, not because the business quality is unchanged. Always confirm whether the low multiple reflects the same business at a lower price or a different business than it used to be.
Tip 4: Run the Dividend Yield Signal for Income Payers
For dividend-paying stocks, the dividend yield relative to the company's 10-year average yield provides a valuation signal. When the dividend yield is above the 10-year average, the stock is typically cheaper than its historical norm (assuming the dividend has not been cut). Johnson & Johnson's 3.1% yield is near the high end of its historical range; historically, JNJ buying opportunities have corresponded with yields above 2.8%.
What are the best stocks to buy right now in a dividend context? Companies where the current yield is 20%+ above the 10-year average yield, assuming the payout is financially sustainable, tend to produce above-average forward 5-year returns.
Tip 5: Calculate Intrinsic Value Before Calling Any Stock Undervalued
A stock is only meaningfully undervalued when you can calculate intrinsic value and demonstrate the gap. The three most practical intrinsic value approaches for individual investors:
First, Graham Number: the square root of (22.5 x EPS x book value per share). This Benjamin Graham formula gives a rough ceiling price for a stock where both earnings and book value are meaningful. It works well for banks, insurance companies, and traditional industrial businesses.
Second, Earnings Power Value: normalize the company's earnings by averaging the last 5-7 years of EPS (smoothing out cycles), then capitalize at an appropriate rate (current rate environment plus a risk premium). This gives you a stable-earnings intrinsic value without growth assumptions.
Third, DCF with conservative assumptions: project free cash flow growth at the lower end of the company's historical range, apply a discount rate of 9-11%, and use a terminal growth rate of 2-3%. This produces a conservative intrinsic value that a stock needs to trade materially below to offer a genuine margin of safety.
Our academy covers all three methods with step-by-step calculations and real stock examples.
Further reading: SEC EDGAR · Investopedia
Why undervalued stocks Matters
This section anchors the discussion on undervalued stocks. The detailed treatment, formula, and worked examples appear in the body of this article above. The points below summarize the most important takeaways for value investors who want to apply undervalued stocks in real portfolio decisions. ValueMarkers exposes the underlying data on every covered ticker via the screener and stock profile pages, so the concepts in this article translate directly into actionable filters.
Key inputs for undervalued stocks
See the main discussion of undervalued stocks in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using undervalued stocks alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for undervalued stocks
See the main discussion of undervalued stocks in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using undervalued stocks alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Related ValueMarkers Resources
- Dividend Yield — Dividend Yield is the metric used to how cheaply a stock trades relative to its fundamentals
- Roe — Glossary entry for Roe
- EPS Growth 1Y — EPS Growth 1Y expresses the rate at which the business is expanding
- Top 10 Best Stocks To Buy Now For Long Term — related ValueMarkers analysis
- Best Stocks To Buy Now For Short Term — related ValueMarkers analysis
- Inspira Financial Login — related ValueMarkers analysis
Frequently Asked Questions
what does ebitda stand for
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. For undervalued stock screening, EV/EBITDA is particularly useful because it lets you compare businesses with different capital structures on an equal footing. A company carrying significant debt will have a lower market cap relative to its operating earnings than an identical business with no debt, but the EV/EBITDA multiple normalizes for this difference, showing what you are actually paying for the operating business regardless of how it is financed.
what stocks to buy
The stocks worth buying are those that pass three simultaneous tests: business quality (ROE above 12%, consistent EPS growth, manageable debt), valuation (current P/E or EV/EBITDA below the company's 10-year average without a corresponding decline in business quality), and catalyst (a specific reason the undervaluation will be recognized within a reasonable time horizon). Without all three conditions, you either own an expensive quality stock, a cheap deteriorating business, or a quality stock at fair value that may appreciate only at the pace of its earnings growth.
what are penny stocks
Penny stocks are shares trading below $5 per share, typically in companies with market capitalizations below $300 million, minimal earnings, limited operating history, and significant bankruptcy risk. They are fundamentally different from undervalued stocks. An undervalued stock is a financially sound business temporarily mispriced by the market. A penny stock is usually a speculative business with no reliable earnings base, limited financial disclosure, and high exposure to fraud and manipulation. The category overlap between penny stocks and genuine value investments is effectively zero.
what does cagr stand for
CAGR stands for Compound Annual Growth Rate. For undervalued stock analysis, the most relevant CAGR is the 5-year and 10-year EPS CAGR, which reveals the trajectory of earnings power over time. A company with a 10% EPS CAGR over 10 years has been consistently building earning power. A company with a volatile or negative EPS CAGR has been destroying or failing to create value. This metric is a core input to any intrinsic value calculation because the terminal value in a DCF model is highly sensitive to the assumed long-term growth rate.
what are the best stocks to buy right now
The best undervalued stocks for long-term purchase as of April 2026 based on fundamental screening are businesses where: the current P/E is below the 10-year historical average P/E, ROE remains above 12% and has not declined materially in the past three years, the dividend payout ratio is below 70% for income payers, and the EPS growth trajectory is positive and consistent. Stocks currently passing these screens include select healthcare companies near JNJ's yield levels of 3.1%, some consumer staples companies with brand moats, and select financial companies where credit cycle fears have compressed multiples below historical norms.
what is eps in stocks
EPS (earnings per share) is net income divided by the weighted average number of diluted shares outstanding. It is the single most important per-share metric for evaluating a stock's earnings power. A company with $1 billion in net income and 500 million shares has EPS of $2.00. The P/E ratio is the share price divided by EPS: a stock at $30 per share with $2.00 EPS has a P/E of 15. EPS growth over time is what drives long-term stock price appreciation in efficient markets. Consistent EPS growth above 10% per year is the characteristic most associated with long-term compounding stocks.
Build your undervalued stock screening workflow from first principles using the 120+ indicators in our academy, covering intrinsic value calculation, margin of safety, and systematic quality filtering.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
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Disclaimer: This content is for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.