Investing in the cheapest stocks right now can pay off if you select wisely. Learn all about the criteria to look for in undervalued stocks in this article

Undervalued stocks are companies that have strong fundamentals and are trading, for one reason or another, at a low share price.

When you’re looking for undervalued stock picks, focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele. Undervalued stocks like these are hard to find, even when the markets are down.

Meanwhile, investing in penny stocks—which generally trade for under five dollars a share, and as the name implies, sometimes for pennies—is one way to buy the cheapest stocks right now. But you need to be very careful. Penny stocks do sometimes pay off, but there are considerable pitfalls to avoid and you have a high probability of losing money.

Use these investment metrics to uncover the cheapest stocks right now worth buying

To get value from any type of investment measure, you need to look at it in the context of everything else that’s going on, in the market and in individual stocks.

As we’re said a number of times, most types of investment measures fall on a spectrum that ranges from suspiciously cheap to extraordinarily expensive.

So, it’s a mistake to focus on stocks in the “suspiciously cheap” end of the p/e spectrum. It’s also a mistake to reject stocks out of hand, just because their high p/e’s and other clues make them seem too expensive.

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Most of the time, investors will find their best opportunities in the middle of the spectrum, far from the extremes of cheap to expensive.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele. Furthermore, we recommend using a few basic ratios.

• A low price-to-earnings ratio may be a sign of cheap or undervalued investments.
• A low price-to-book-value ratio is another sign that a stock is cheap in relation to other stocks on the market.
• Dividend yield is the stock’s annual dividend divided by the share price. A high dividend yield could indicate a cheap stock that is set to rise. 

Practice patience with low-priced, high-quality stocks and you could profit as their value increases

As more investors come to recognize the value of so-called undervalued stock picks, they begin to rise. Well-informed investors who recognized the value when the stock price was lower benefit from that rise.

It is best to practice patience with your investments, especially value stocks. All too often, investors buy a promising stock just as it enters a period of price stagnation. Even the best-performing stocks run into these unpredictable phases from time to time. They move mainly sideways in a wide range for months or years before their next big rise begins. (Stock brokers often refer to these stocks as “dead money.”)

If you lack patience, you run a big risk of selling your best choices in the midst of one of these phases, prior to the next big move upward. If you lose patience and sell, you are particularly likely to do so in the low end of the trading range, when stock prices have weakened and confidence in the stock has waned. 

Use our three-part Successful Investor approach to find the best stocks for your portfolio, including the cheapest stocks right now 

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight. 

By looking for a “deal” when you buy the cheapest stocks right now, you could open yourself up to added risk

If you always try to buy stocks below the current trading price on the stock market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range ….and they’ll keep on falling.

But you’ll never get to buy the other kind of stock—the kind that keeps going up. These stocks will always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.

There’s no easy answer to the buy-now-or-wait dilemma. At times it may pay to hold off—for instance, a company’s stock will often rise when it announces a stock split, then fall after the split takes effect.

In the end, if a stock is truly worth investing in, you should be willing to buy it at current prices, even if that means you run the risk of having to sit through a 5% to 10% setback. Before it slips into that next 5% to 10% setback, after all, it may first go up 50% to 100%.

Does investing in the cheapest stocks right now excite you, or do you inherently avoid them?

What factors do you use to differentiate between cheap stocks and value stocks?