How does one determine if a stock is undervalued or overvalued?

One way to determine if a stock is undervalued or overvalued is to analyze the stock's intrinsic value, which is an estimate of the true worth of a company's stock based on its financial and economic fundamentals. If the stock's market price is lower than its intrinsic value, it is considered undervalued, and if the market price is higher than its intrinsic value, it is considered overvalued.

To determine a stock's intrinsic value, fundamental analysis can be used, which involves analyzing the company's financial statements, industry trends, and economic factors to estimate its future earnings potential. Once an estimate of the company's future earnings has been made, a discounted cash flow (DCF) analysis can be performed, which takes into account the time value of money and estimates the present value of the company's future cash flows.

In addition to intrinsic value analysis, relative valuation can also be used to determine if a stock is undervalued or overvalued. This involves comparing the stock's current price to its historical price, peer group, or industry average. If the stock's price is lower than its historical average or the average of its peers or industry, it may be undervalued, and if the price is higher, it may be overvalued.

It is important to note that no single metric or analysis can determine if a stock is undervalued or overvalued with certainty, and that a combination of different approaches and analysis is often used to make informed investment decisions.