Case Study: Using Indicators of Undervalued Stocks to Uncover Investment Opportunities
Indicators of undervalued stocks are the specific, measurable signals that separate a cheap stock from a genuinely mispriced business. The distinction matters: some stocks are cheap because they are failing, and others are cheap because the market has temporarily mispriced a fundamentally sound business. The goal of this case study is to show, with real data, how to tell the difference.
This post walks through four actual companies at different points in their valuation cycles, using the indicators we track in the ValueMarkers screener to identify which represented genuine opportunity and which were value traps.
Key Takeaways
- The most reliable indicators of undervalued stocks combine valuation metrics (P/E, earnings yield, P/B) with quality metrics (ROIC, ROE, free cash flow yield) rather than treating any single number in isolation.
- A low P/E on a low-ROIC business is not a bargain. A P/E of 14 on a business earning 22% ROIC often is.
- Earnings per share (EPS) growth trajectory matters as much as the current P/E: a falling P/E driven by rising earnings is very different from a falling P/E driven by a falling share price.
- Debt-to-equity ratios above 2.0 significantly raise the risk that a cheap stock is cheap for permanent reasons.
- Beta is a useful filter for understanding whether short-term price pressure is macro-driven (opportunity) or company-specific (risk).
- The ValueMarkers VMCI Score, which weights Value (35%), Quality (30%), Integrity (15%), Growth (12%), and Risk (8%), is designed specifically to surface stocks where multiple indicators align.
The Four Indicators That Matter Most
Most discussions of undervalued stocks get lost in a list of 30 metrics. In practice, four indicators do the heavy lifting when identifying genuine mispricings.
1. Earnings Yield vs. Risk-Free Rate
Earnings yield is the inverse of the P/E ratio: annual earnings per share divided by share price. It tells you the implicit return on equity you are buying at the current price. Comparing it to the 10-year Treasury yield gives you a simple spread: the equity risk premium you are receiving.
With the 10-year Treasury at approximately 4.3% as of April 2026, a stock with an earnings yield of 7.1% (P/E of 14) offers a spread of 2.8 percentage points. That is closer to the historical average equity risk premium of 3.0 percentage points and represents a more attractive setup than a stock with a 4.8% earnings yield (P/E of 21) offering just 0.5 points of spread.
2. Return on Invested Capital (ROIC)
ROIC measures what a business earns on the capital it deploys, including both equity and debt. A business with ROIC above its cost of capital is creating value with every dollar reinvested. A business with ROIC below its cost of capital destroys value even when it reports positive net income.
Apple (AAPL) at a ROIC of 45.1% and a P/E of 28.3 is a fundamentally different investment proposition from a business with a P/E of 28 and a ROIC of 7%. Same apparent "expensiveness" on P/E, but completely different intrinsic value dynamics.
3. Forward P/E vs. Trailing P/E Spread
When forward P/E is significantly below trailing P/E, analysts are projecting earnings growth. A stock with a trailing P/E of 18 and a forward P/E of 13 is pricing in a 38% earnings increase: either an opportunity (if growth materializes) or a trap (if estimates are too optimistic).
4. Debt-to-Equity as a Safety Check
A genuinely undervalued stock should have a balance sheet that gives the business time to recover. Debt-to-equity above 2.0 creates refinancing risk in rate-rising environments and limits management's flexibility to invest through a downturn.
Case Study 1: Johnson & Johnson (JNJ) in Early 2026
Johnson & Johnson's trailing P/E as of April 2026 sits at approximately 14.2, against its 10-year historical average of 16.8. ROIC is around 22.4%. The dividend yield is 3.1%. Debt-to-equity is approximately 0.4. The company has paid and grown its dividend for 62 consecutive years.
Running these numbers through the indicators framework:
- Earnings yield of 7.0% versus a 4.3% risk-free rate: 2.7 percentage points of spread (historically attractive)
- ROIC of 22.4%: well above cost of capital, moat confirmed
- Forward P/E of 12.8 versus trailing of 14.2: modest earnings growth expected
- Debt-to-equity of 0.4: balance sheet gives management full flexibility
The VMCI Score for JNJ comes out near 82 out of 100, driven by strong Value and Quality pillar scores. The one overhang is litigation risk from talcum powder lawsuits, which suppresses the Integrity pillar score. For investors who have sized it alongside other high-quality names, the spread between fair value and current price is wide enough to absorb further litigation news without permanent impairment.
Case Study 2: Berkshire Hathaway B-Shares (BRK.B) in Late 2024
Berkshire Hathaway B-shares at a price-to-book of 1.5 represent a different kind of undervaluation. Buffett has publicly stated that Berkshire repurchases its own shares when book value trades below 1.2 to 1.3, which puts 1.5x as the range where the market is offering fair to modestly attractive value.
| Metric | BRK.B (Late 2024) | S&P 500 Median |
|---|---|---|
| Price-to-Book | 1.5 | 4.1 |
| 5-Year EPS Growth | 11.2% | 8.4% |
| Debt-to-Equity | 0.28 | 0.71 |
| Operating Cash Flow Yield | 6.8% | 4.2% |
| Dividend Yield | 0% | 1.9% |
Berkshire at P/B of 1.5 is interesting because the underlying businesses (GEICO, BNSF, Berkshire Energy, and 40+ wholly owned operations) compound capital at rates significantly above the book value growth rate. The cash pile of $280+ billion at end of 2024 acts as a call option on future market dislocations, which a price-to-book calculation does not capture. The book value growth rate of 9-11% annually over the prior decade, combined with Buffett's repurchase discipline as a downside backstop, defines the risk-reward clearly.
Case Study 3: A Classic Value Trap Avoided
Not every low P/E stock is undervalued. Consider a hypothetical retailer: P/E of 9, dividend yield of 5.5%, and debt-to-equity of 3.2. On the first two metrics it looks compelling. The balance sheet tells a different story.
Debt-to-equity of 3.2 means for every dollar of equity, the company has borrowed $3.20. In a rising rate environment, refinancing that debt is expensive. The dividend, funded partly by debt rather than free cash flow, is at risk of being cut. The P/E of 9 reflects the market's assessment of these risks, not a mispricing.
Filter for P/E below 15 AND debt-to-equity below 1.5 AND free cash flow yield above 5%. Companies that pass all three filters are much more likely to be genuine mispricings than those that pass only one.
Understanding EPS and Why It Matters for Finding Undervalued Stocks
EPS (earnings per share) is net income divided by diluted shares outstanding. Its trajectory is often more informative than its current level.
A company with EPS of $4.00 growing at 15% per year will have EPS of $8.00 in five years. At $8.00 EPS and a P/E that merely stays at 20, the stock doubles in five years. If the P/E contracts to 15, the stock is still worth 30% more in five years. EPS growth absorbs multiple contraction.
A stock with a P/E of 25 and a 20% EPS growth rate (PEG of 1.25) is often cheaper in real terms than a stock with a P/E of 12 and 0% EPS growth. Microsoft (MSFT) at a P/E of 32.1 with consistent 12-15% EPS growth illustrates this: the forward P/E at 27.6 looks more reasonable, and five years of 13% EPS growth reaches a P/E of 18 at the current price with no stock price movement at all.
How Beta Helps You Distinguish Macro Pressure from Business Deterioration
Beta measures how much a stock moves relative to the overall market. For finding undervalued stocks, it is useful as a diagnostic tool. When a low-beta stock falls significantly during a broad market selloff, the price decline is likely macro-driven rather than business-specific. If the business fundamentals (ROIC, margins, earnings growth) remain intact, that selloff is the opportunity.
Coca-Cola (KO) with a beta near 0.6 and a dividend yield of 3.0% is an example. When KO's dividend yield rises above 3.5% during a market decline, it has historically signaled genuine value territory, because the underlying business is stable enough that a 3.5% yield represents clear margin of safety.
Building a Repeatable Screen for Undervalued Stocks
Based on the case studies above, here is the filter combination that surfaces genuine opportunities most reliably:
| Filter | Minimum Threshold | Rationale |
|---|---|---|
| Earnings Yield | Above 5.5% | Spread over risk-free rate |
| ROIC | Above 15% (5-year avg) | Capital allocation quality |
| Forward P/E | Below 18 | Valuation anchor |
| Debt-to-Equity | Below 1.5 | Balance sheet safety |
| EPS Growth (5-year) | Above 5% | Earnings trajectory |
| Free Cash Flow Yield | Above 4% | Cash generation confirmation |
| VMCI Score | Above 70 | Composite quality/value signal |
Run this filter set in the ValueMarkers screener across 73 global exchanges. The combination typically returns 40-80 stocks that warrant deeper investigation. Each one clears the basic undervaluation tests; the next step is a qualitative moat assessment and a DCF model.
Further reading: Investopedia · CFA Institute
Why how to find undervalued stocks Matters
This section anchors the discussion on how to find 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 how to find 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 how to find undervalued stocks
See the main discussion of how to find 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 how to find undervalued stocks alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for how to find undervalued stocks
See the main discussion of how to find 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 how to find undervalued stocks alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Related ValueMarkers Resources
- Earnings Yield — Earnings Yield is the metric used to how cheaply a stock trades relative to its fundamentals
- Forward Pe — Glossary entry for Forward Pe
- Debt To Equity — Glossary entry for Debt To Equity
- Economic Indicators Value Investing — related ValueMarkers analysis
- Intrinsic Value Economics — related ValueMarkers analysis
- Seeking Alpha Economic Calendar — related ValueMarkers analysis
Frequently Asked Questions
what stocks to buy
The stocks most worth investigating are those that combine low valuation (earnings yield above the risk-free rate, P/E below the 10-year average) with high quality (ROIC above 15%, consistent free cash flow). As of April 2026, names like Johnson & Johnson (JNJ) at a P/E of 14.2 and Berkshire Hathaway (BRK.B) at P/B of 1.5 clear these basic filters and represent reasonable starting points for deeper analysis. Always verify with a DCF model before sizing a position.
what are penny stocks
Penny stocks are shares trading below $5, typically in small or micro-cap companies with limited liquidity, minimal regulatory reporting requirements, and high susceptibility to price manipulation. They are generally not compatible with a fundamental value investing approach because the data needed for reliable intrinsic value analysis (audited financials, consistent operating history, analyst coverage) is often incomplete or unreliable. The "cheap" price per share does not make them undervalued in any meaningful sense.
what percentage of united health group is owned by vanguard
Vanguard holds approximately 8-9% of UnitedHealth Group (UNH) outstanding shares as of the most recent 13F filings, making it one of the two or three largest institutional shareholders alongside BlackRock. This level of institutional ownership is typical for a large-cap Dow Jones constituent. Vanguard's position is primarily through index funds that own UNH because it is a constituent of the S&P 500 and other broad indices, not because of an active investment decision.
what are the best stocks to buy right now
The best stocks to buy at any given time are those where your own intrinsic value estimate exceeds the current market price by at least 25%, the business has a durable competitive advantage (evidenced by ROIC above 15% sustained over five or more years), and the balance sheet provides enough cushion to absorb a multi-year downturn without requiring dilutive capital raises. Running the ValueMarkers screener with VMCI Score above 75 and forward P/E below 18 gives you a filtered starting list to apply these criteria against.
what is eps in stocks
EPS (earnings per share) is calculated by dividing a company's net income by its diluted share count. It represents the portion of a company's profit attributable to each outstanding share. Diluted EPS accounts for all potential shares from options, warrants, and convertible securities. EPS growth rate (how fast EPS is growing year over year) is often more informative than the absolute EPS level because it tells you whether the business is compounding value for shareholders.
what is beta in stocks
Beta is a statistical measure of a stock's price sensitivity relative to a benchmark index, typically the S&P 500. A beta of 1.0 means the stock moves in line with the market. A beta of 1.5 means the stock tends to move 50% more than the market (up or down). A beta of 0.6 means the stock moves only 60% as much as the market. For value investors, beta is most useful as a diagnostic tool to distinguish macro-driven price declines (opportunity in low-beta quality names) from business-specific deterioration (which requires updating the investment thesis).
Find your next undervalued stock by running the quality and valuation filters above in the ValueMarkers screener. Over 120 indicators, 73 global exchanges, and a VMCI Score that combines all five pillars in one number.
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.