“The P/E ratio is low,” “The P/B ratio is below 1x,” “It’s clearly undervalued compared to industry peers”—when you find stocks like these, I completely understand the urge to enter a position thinking, “This must be a bargain.” When I first started swing trading, I often entered positions based solely on undervaluation, only to have a bitter experience when the stock didn’t move as expected.
Today, I would like to share what I have felt over the past 10 years regarding whether undervalued stocks are suitable for swing trading. This is less about how to look at indicators themselves, and more about how to maintain a healthy distance from the concept of undervaluation.
Undervaluation is a “reason to buy,” but not a “reason to go up now”
First, I want to clarify that being undervalued and the stock price rising in the future are two completely different things. Theoretically, undervalued stocks are attractive in the sense that you can buy them for less than their intrinsic value. However, no one knows when the stock price will catch up to that intrinsic value. It might be in a few months, or it might remain undervalued and ignored for years.
Swing trading is a method that aims for results within a limited timeframe of a few days to a few weeks. Being undervalued does not, in itself, directly provide a reason for the stock price to move within this timeframe. My experience is that unless there is a catalyst for movement—a reason why this undervaluation is about to be corrected right now—no matter how cheap it is, it won’t be a viable candidate for swing trading.
Why undervalued stocks tend to become “perpetually undervalued”
Among undervalued stocks, there are many that have been left ignored for years. There are various reasons for this, but in many cases, it is a combination of factors such as low expectations for growth, uncertainty about future earnings, and low liquidity that makes it difficult for institutional investors’ capital to enter.
In other words, there is usually a “reason for being undervalued.” As long as this reason is not resolved, the stock price will continue to remain undervalued. To achieve results in swing trading, you need to capture the moment when this “reason for being undervalued” begins to crumble—that is, the timing when material that triggers a re-evaluation emerges. Rather than the undervaluation itself, the signs that the undervaluation is beginning to be corrected are what serve as actual decision-making material.
What I check when looking at undervalued stocks
When I consider undervalued stocks as candidates, I don’t just look at the low indicators; I check whether the following changes are occurring.
Are there signs of improvement in the financial results? Have earnings forecasts been revised upward? Is there a theme emerging that acts as a tailwind for the entire industry? And, in response to these factors, is there an actual change in price movement accompanied by volume? Undervaluation on indicators is just material for creating an “initial candidate list,” and whether I actually enter a position from there is always judged based on the three axes of theme, trend, and liquidity.
When undervaluation and theme overlap, it is the strongest
Conversely, when a clear theme overlaps with an undervalued stock, it becomes a very attractive candidate for swing trading. When a catalyst for capital to flow in (such as earnings improvement or a re-evaluation of the entire industry) is added to a “stock that should be valued higher,” re-evaluation buying tends to progress all at once, and there is a tendency for the price range to expand.
I once saw a stock that had been left at an undervalued level for a long time rise significantly over several weeks, triggered by a re-evaluation of the entire industry. If I had entered this stock based solely on its undervaluation, I would have had my capital tied up for a long time without knowing when it would move. It actually moved only after a concrete trigger, such as an improvement in earnings, appeared. While being undervalued provides a sense of security—asking “why has it fallen this far, isn’t it oversold?”—my experience is that the trigger for entry is always something else.
Conclusion: Undervaluation is a “safety margin,” not a “trigger”
My conclusion on whether undervalued stocks are suitable for swing trading is that undervaluation itself is not a trigger for entry, but it does serve as a safety margin when considering the expected range. Because it has already fallen, the downside risk is relatively small, which tends to work positively when considering risk-reward.
However, if it is not accompanied by a trigger to start moving, that sense of security can lead to your capital being tied up for a long time. While undervaluation is an attractive prerequisite, I recommend not deciding on an entry based on that alone, but rather using it in combination with your usual judgment criteria.
The feeling that “if you wait, you will be rewarded” is dangerous in swing trading
When you hold undervalued stocks, it is easy to develop the feeling that “if you consider the intrinsic value, you will eventually be rewarded,” even if you have an unrealized loss. While this feeling can be a source of support for long-term investment, I try to view it as a dangerous sign within the framework of swing trading.
This is because the expectation that “you will eventually be rewarded” is the easiest excuse to postpone a stop-loss line. Whenever I feel the urge to continue holding based on undervaluation, I try to ask myself, “Is this a swing trading decision, or has it shifted to a long-term investment expectation?” I feel that when dealing with undervalued stocks, it is necessary to consciously adhere to stop-loss rules more than ever.
Being attracted to low valuations is not a bad thing in itself. However, I believe that organizing for yourself in advance how to handle that within the time horizon of swing trading, and how to distinguish it from a long-term investment perspective, will ultimately lead to protecting your capital.
※ This article shares my own way of thinking and criteria based on my personal experience, and does not recommend the buying or selling of any specific stocks. All stock examples in this article are fictitious. Please make final investment decisions at your own responsibility.