By: Montana Timpson
Are recent tech and biotech security and ETF runups cause for bullish celebrations or bearish concerns for a potential near-term catalyst for correction?
One biotech company leading in the news is vaccine developer Moderna Inc. (MNRA), whose stock pared back 10% in a recent afternoon trading session after surging 55% in the three trading days prior. Even after setting another intraday record for the fourth straight session, Moderna’s 10% nose-dive supported bearish market expectations, while bulls expect higher pricing to prevail after the pandemic winds down. To understand both bearish and bullish perspectives in this period of market volatility, traders must understand the defining valuations of securities.
A stock that is “overvalued” has a current price that is not justified by its earnings outlook, or the P/E ratio, which analyzes a company’s stock price relative to its earnings. An overvalued stock traditionally trades at a rate significantly in excess of its peers, which can occur for a litany of reasons.
While growth stocks are often big winners during a bull market, they tend to endure tough sell-offs during market corrections due to their overvaluation.
Fully Valued Securities
In contrast to an overvalued stock, a fully valued stock is a security whose price reflects a full and fair value, according to market analysts. In theory, a stock priced at fair market value is unlikely to suffer any short-term price changes. If a stock deemed “fully valued” were to increase suddenly in price, it would be considered overvalued. In tandem, if it were to decrease suddenly, it would be considered undervalued.
If a stock is considered “undervalued,” the security is trading at a price presumed by analysts to be less than the security’s true intrinsic value. An undervalued stock can be assessed by considering company fundamentals, including financial statements, cash flow, profit generation, return on assets and capital management.
Undervalued securities often come into play in “value investing” trading strategies, in which traders aim to profit by buying valuable stocks at a discounted price.
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