How to find undervalued stocks: A Mini Case Study

How to find undervalued stocks

When Airbnb’s stock price plunged, recently, I bought shares close to the bottom, then sold them for 25.5% return in 22 days. If you can find undervalued stocks, it can mean profit in both the short and long term.

Let’s look at the rationale behind my decision to buy Airbnb when I did.

My name is Erwin Szeto and I’m one a co-founder of Stock Hacker Academy. I’m a real estate investor and now a stock hacker. Trades don’t always go in my favour and if you follow me on social media, I often share those losses.

But today let’s look at why I thought Airbnb was an undervalued stock.

What is the market doing?

I read the news a lot. I have a lot of money invested out there. Those investments mean a lot to my family and my kids’ future. So I read a lot.

One economist I follow closely is Benjamin Tal. He’s the Deputy Chief Economist at CIBC World Markets. I’ve been following him since 2008 and made a lot of money following his interpretation of the world.

In an article at the beginning of the year, Benjamin predicted a few things that stood out to me.

  • The market expects five interest rate hikes, Ben expects three.
  • Supply chain issues need to be muted.
  • 20% – 25% over demand for goods, under demand for services.
  • “Remove covid and, slowly, inflation will disappear.”
  • The consensus is that Covid will be seasonal moving forward.

The biggest point there for me was that there is a 20% to 25% over demand for goods and under demand for services. 

That means there was a big demand for “stuff” during the pandemic, like clothing, toys, tools, just “things” in general.  People couldn’t go anywhere, they were stuck working and playing at home, so they weren’t spending on experiences, or “services.”

However, pre-pandemic, a lot of people relied on services, everything from McDonalds for breakfast to travel agents, personal trainers, and theatres. 

Again, I research and read as much as I can. And I don’t believe any one single source. So I found a report from TD with this graph.

This is the last 20 years comparing the demand for goods versus the demand for services. 

You can see that the demand for goods has gone crazy. Whereas the demand for services hasn’t recovered yet.

And we really don’t need a graph to tell us this because we see it all the time in the stores. We know how much the prices for goods have gone up.

But never before have goods been so much more inflated than services (look how far the “goods” line is above the “services” line).

Now check out the amount of savings Canadians have built up over the past two years, according to TD Economics.

Even though the price of goods have gone up, people are stashing more cash.

Quoting TD, “consumers have built up $300 billion in excess savings.”

So what do you think’s going to happen when restrictions end?

Stephen Poloz, the former governor of the Bank of Canada, also believes that inflation will be easing throughout the year. He thinks that inflation will ease as restrictions end and prices come down.

Using that information to find undervalued stocks

Whenever I’m taking in information, I’m always looking to see how I can take advantage of it. Knowledge is power, so how can I profit from what I’ve just learned?

So I developed the theory on Airbnb. Based on what we’re seeing in the world, people have been cooped up, they haven’t been spending on experiences, and they’re flush with savings.

Restrictions are easing here in Ontario and they’re even talking about when they’re going to make masks optional.

I have friends that own and operate Airbnb’s. They tell me that demand is so big that they’ve been raising their prices and getting bookings for longer stays. That’s a formula for making money.

As a company, Airbnb crushed Q3 2021 earnings. They reported $834 Million net income which is their most profitable quarter ever. However, because of a correction in tech stocks as an industry, Airbnb’s stock price has been dragged down.

So as a company, there is a lot of pent up demand for their service, they’re more profitable than they’ve ever been, yet their stock price is falling.

What to do with an undervalued stock

Here’s the price of Airbnb over the last year:

The blue arrow is when Airbnb reported Q3 earnings in NOV 2021. The price jumped well over 10%. However, since then, there’s been a larger market correction. You can see Airbnb gave back all of it’s progress after earnings, and then some.

Now, based on my theory, based on how I see the world, I decided that Airbnb was a good investment. So I bought shares at $145 (where the sun is on the chart). I felt good about owning Airbnb long term at that price.

When Q4 earnings came in, the stock price rallied again. So I sold my shares at $182 the day after earnings.

Here’s a screenshot from my trading account:

  • Bought Airbnb at $145/share on January 25th, 2022
  • Sold at $182.03/share on February 16th, 2022
  • Return on Investment: $37.03 per share or 25.5%

Of course I am very happy. I would have been much happier if I bought a lot more shares, but who’s complaining about a 25.5% return in 22 days?

Not me.

So what am I supposed to do with all of this?

Here are a few questions I hope you can start to answer after reading this article:

  1. Where and who are you getting your information from? Are they trustworthy, do they have a proven track record?
  2. What are the investments / companies you can understand? I understand the Airbnb model. I used to operate one and I have many friends who do really well with their Airbnb properties.
  3. What price are you comfortable buying a particular stock at? If things go sideways, are you still confident in your theory, or are you still comfortable holding shares in that company?
  4. What’s your exit plan? Is it to hold long term, or are you looking to make a profit in the next few months? What price do you want to sell at? Why?

This may seem like a lot, but it comes with time and practice. Just like real estate, buy and hold stock investing is the easiest, least stressful strategy you can use. 

I intended to hold for the long term, but I saw a juicy profit and took it. No one ever went broke taking profits.

If this is intriguing to you, consider subscribing to our “Stock Hacker Report.” It’s our weekly newsletter filled with info and education like you just read here. That link will also let you download a FREE case study we compiled called “The Ultimate Side Hustle for Canadians.”

Whatever you choose, we’ll talk to you later!

Happy trading,

Erwin and Cherry Szeto

P.S. If you’re interested in finding a new side hustle, we’ve put together a new case study that examines the four most popular side hustles for passive income in Canada. You can download this case study for FREE right now if you sign up for our email newsletter.

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