Value investing: how to find undervalued stocks

What value investing actually is

Value investing is buying a business for less than it is worth and waiting for the price to catch up. The idea is old (Benjamin Graham wrote it down in the 1930s), and the hard part has never been understanding it. The hard part is the estimate of "worth", and then holding on while a cheap stock stays cheap, or gets cheaper, for years.

A share price is what the market will pay today. Value is what the business's future cash flows are worth to an owner. The two drift apart because markets overreact to bad quarters, ignore dull sectors, and chase whatever went up last year. A value investor tries to stand on the other side of those moods, with a margin of safety: a gap between price and estimated value wide enough to absorb the mistakes in the estimate.

The ratios that flag a cheap stock

No single number says "undervalued". These ratios are filters that narrow thousands of listed companies to a shortlist worth reading about.

Compare each ratio with three things: the company's own history, its direct competitors, and the market as a whole. A bank at 1.2 times book and a software company at 1.2 times book are not the same bargain. Banks hold financial assets at close to market value; a software company's real assets (its people and code) barely appear on the balance sheet at all. Our guide to reading an index P/E covers why the same number means different things in different places.

How cheap value is today, by the numbers

NSE publishes valuation ratios for its factor indices, which pick stocks by exactly these screens. As of 1 October 2026:

The value indices trade at roughly half the Nifty 50's earnings multiple. For context, the Nifty 50's own P/E of 19.19 sits below its median of 20.88 since January 1999; it has been lower than today on only about a third of trading days in that time. You can follow the broader market's multiple in our monthly Nifty 50 P/E post.

A low index multiple tells you the screens are finding cheap stocks. It does not tell you those stocks will do well. Value indices are heavy in banks, energy, metals and state-owned companies, sectors the market prices low partly because their profits swing with the economic cycle.

The value trap

The most expensive mistake in value investing is buying something that is cheap for a good reason. Signs of a value trap:

• Peak-cycle earnings. A steel or cement company at a P/E of 6 may be earning far above its normal profit. When the cycle turns, the "E" shrinks and the P/E balloons without the price moving.
• Shrinking business. A company losing market share each year can look cheap on every ratio all the way down.
• Assets that aren't worth book value. Bad loans not yet recognised, stale inventory, or capital work-in-progress that will never earn a return.
• Governance discounts. Related-party transactions, frequent auditor changes or high promoter pledging can keep a stock cheap indefinitely, and sometimes the discount is too small.
• Debt. A low P/E on a heavily indebted company ignores the lenders, who get paid first.

The usual defence is to pair cheapness with quality: steady return on equity over a full cycle, manageable debt, cash flow that roughly matches reported profit, and a record of treating minority shareholders fairly.

A practical screening routine

1. Start wide, filter on price. Look for P/E or P/B in the bottom third of the market or of the company's own ten-year range.
2. Filter on quality. Drop companies with high debt to equity, falling return on equity over five years, or operating cash flow well below profit.
3. Read the reason. For every name left, write one sentence on why the market is pricing it low. If you can't find the reason, you haven't done enough reading. If the reason is permanent, move on.
4. Estimate a value range, not a point. Use normalised earnings (an average across a cycle), not this year's figure.
5. Size for being wrong. Some of the shortlist will be traps no matter how careful you are. No single position should be able to sink the portfolio.
6. Set a review rule. Decide in advance what would prove the thesis wrong, so you aren't deciding under stress.

WealthTicker's stock screener lets you filter listed companies by P/E, P/B and other ratios as a starting point for step 1.

Value through a mutual fund

Most people don't have the time for step 3 on fifty companies. SEBI's category rules give two fund types that do this for you: value funds and contra funds, both of which must hold at least 65% in equities. Here is how they have done, using Direct plans, Growth option, as of 1 October 2026:

Median annualised returns (1 year is absolute). Source: WealthTicker, from AMFI NAV history.

Two things stand out. Over five years, value funds were ahead of flexi-cap and large-cap funds at the median. And the spread inside the category is wide: three-year returns among the 24 value funds ran from 5.45% to 19.28% a year. "Value" is a label on a style, and managers apply it very differently. Compare individual schemes in the value fund list or in our earlier value and contra fund review.

Value also goes through long dry spells. The style can trail growth stocks for several years running, which is exactly when investors give up on it. Our guide to value vs growth investing explains why the two take turns.

The patience problem

Value investing pays you for doing something uncomfortable: owning what other people don't want, and holding it while the price says you are wrong. The ratios are easy to calculate. The edge, if there is one, comes from the reading in step 3 and the discipline in step 6.

This article is for education only and is not investment advice or a recommendation to buy or sell any security. Past returns do not predict future returns.