stocks

Discounted Stocks With Earnings Growth - Investing Strategy

Stock Market Guides is not a financial advisor. Our content is strictly educational and should not be considered financial advice.

When it comes to the stock market, sometimes you might hear people talking about looking for discounted stocks with earnings growth.

This article will explain what that term means and offer a specific investing strategy for it.

 

What Are Discounted Stocks?

Simply put, if a stock is discounted, it may offer an opportunity to profit.

Discounted, by definition, means lower than its normal price. If you can buy a stock when it's discounted, it might prove to be profitable if the stock eventually returns to its normal price.

There are lots of ways to measure the value of a stock, and in turn, whether its current stock price is discounted from that value or not.

You could look at a stock's PE ratio as one way of determining whether it could be undervalued. There are other ratios you can consider, too, such as its PS ratio.

A really simple way to determine if a stock is discounted is simply to see how the current stock price compares to the stock's 52-week high. If, for example, the stock is trading 40% below its 52-week high, that could be seen as being discounted, as the price might eventually get back to its previous highs.

 

What Is Earnings Growth?

Earnings, or profits, are a cornerstone of any company's financial health and are often referred to as the "bottom line" since they can be found at the bottom of a company's income statement.

Many people feel that a company's value lies in its ability to generate earnings, since earnings represent the net incremental economic benefit a company is creating.

If a company is exhibiting earnings growth, that is a signal that the company is strong and could see its share price expand in the future.

 

Why Look for Discounted Stocks With Earnings Growth?

Each of these criteria (stocks with a discount and stocks with earnings growth) are solid investment strategies independently.

If you combine them together, it might amplify the potential benefit of taking on an investment. It's like merging two strong approaches to make a singular approach that could be even better.

How Do You Find Discounted Stocks With Earnings Growth?

You can find them by using our Undervalued Stocks scanner. It's a free tool we offer here at Stock Market Guides. It uses our proprietary scanning technology to find discounted stocks with earnings growth, among other things.

Here's how the scanner results look:

 

That tool ensures that you don't have to waste time flipping through stock profiles manually to find discounted stocks with earnings growth.

 

 

Example of a Strategy for Discounted Stocks With Earnings Growth

For this example of a Discounted Blue Chip investing strategy, we're going to look for stocks that have prices at least 20% below their 52-week high and that exhibited earnings growth as per their most recent financial reports. We'll plan to hold them for up to a year.

Our research suggests this simple strategy might have a track record of success.

 

Entry for the Investment Strategy

The entry for this strategy will be as follows:

Exit for the Investment Strategy

There are a lot of possibilities here for the exit.

For any given investing strategy, it can be helpful to define two different criteria for the exit: a profit target and a time limit.

Not everyone sets exit criteria for a long-term investment, and that's totally fine. Ultimately, you are in charge of your investments, and you can manage them any way you want. But for the purposes of this investing strategy example, we will define them:

 

1. Profit Target

We will set a profit target that would reflect a 40% gain if the position were to be sold at that price.

In other words, we will take the price we paid for the stock at entry, multiply it by 1.4 (which effectively adds 40%), and use that to set up a sell limit order as a profit target.

If the sell limit order gets filled before the time limit is reached, then our investment is complete, and we will have realized a 40% return on investment.

2. Time Limit

We will set the time limit as one year. If the stock has not hit the profit target within one year of the date of stock purchase, then we can close the trade manually at the stock's prevailing price.

 

How Well Do These Investments Actually Work?

The idea of a strategy to buy discounted stocks with earnings growth sounds nice to many people because it offers a clear, easy-to-understand way to find an investment idea.

But does it actually work? Can traders indeed generate profits from buying these types of stocks?

That's exactly what our company can help answer for you, since our scanner technology has allowed us to do our own research on that precise question.

The answer is that investments in discounted stocks with earnings growth are not always profitable, but for certain stocks they might indeed have a track record of success according to our backtest research.

 

Learning More About Discounted Stocks With Earnings Growth

You can contact us any time if you would like to ask any questions about discounted stocks, earnings growth, or anything else related to the stock market.