Low stock valuation does not equal undervaluation! A low-valuation stock can still fall another 50%.

Even when a stock’s valuation appears extremely cheap, such an awkward situation can still occur! So why is investing so difficult? When a stock continues to plunge sharply after already looking cheap—and then languishes at the bottom for two or three years—will you break down? Will you still trust your own value judgment? I suspect most people simply cannot endure it! To understand why this happens, we must first distinguish between 'low valuation' and 'undervaluation'. I. Low valuation is an objective state; undervaluation is a subjective judgment. Low valuation is static! For example, banks currently trade at just 0.6x price-to-book (PB)—this is a static fact, observable by all. Comparing this valuation to banks’ historical valuations, it clearly sits at a historically low level. Compared with other sectors, banks’ valuations are also markedly low. Yet whether a 0.6x PB ratio truly reflects undervaluation—or overvaluation—is ultimately our subjective judgment! We may believe the stock is undervalued, yet it could still drop another 50%. What then? So on what basis do we judge whether a stock is overvalued or undervalued? Different investors use different criteria—but certain guiding principles do exist. II. Principles for judging overvaluation vs. undervaluation First, compare the stock’s or sector’s current valuation against its own historical valuation. This yields a valuation range: when the current valuation hits a historical low, we may deem it undervalued. However, this only holds if the company’s or sector’s fundamentals have not undergone major changes. For instance, a company may be willing to pay a 25-year-old employee ¥20,000 monthly—but by age 55, the same company might think: “Just get out!” Thus, historical valuations are useful references—but never apply them mechanically. Today, ICBC trades at just 0.5x PB, whereas over a decade ago its PB was routinely above 2x. These are simply incomparable! Even the valuation ‘central tendency’ of broad-market indices shifts up or down depending on sector composition and interest-rate levels. Second, future growth potential is the bedrock of valuation. A stock capable of sustaining high growth over the long term commands a valuation premium. For example, consider Companies A and B, both earning ¥1 million in initial profit: A grows at 10% annually, B at 20%. After 20 years, A’s profit reaches ¥6.72 million, while B’s surges to ¥38.33 million! So paying ¥10 million for A may be less sensible than paying ¥30 million for B. But the difficulty lies precisely in the word “future”! Predicting profits even three years ahead is extremely hard—let alone twenty. Hence, truly outstanding stocks are exceedingly rare! And thus we see why buying solely based on low valuation leads to serious errors. Third, asset quality affects valuation. Broadly speaking, valuation hinges on asset quality. Examples: 1. Capital-intensive stocks typically trade at discounts; asset-light ones command premiums. But not always—if capital intensity itself constitutes a competitive moat, it may actually support a valuation premium. 2. High-leverage companies trade at discounts; low-leverage ones earn premiums. Sectors like real estate, banking, infrastructure, and heavy industry tend to have low valuations—largely because their high debt loads carry substantial hidden default risk. Conversely, companies with minimal debt enjoy valuation premiums.

How do we determine whether a stock’s valuation is high or low?

Entry price: ¥6.47 — China National Pharmaceutical Group Corp. Entry price: HK$15.45 — China Resources Pharmaceutical Group Ltd. Sold this week: Jiangsu Ninghu Expressway Co., Ltd. Exited fully at HK$11.48 Qingdao Port International Co., Ltd. Exited fully at HK$8.135 Jiangsu Ninghu Expressway: bought at HK$9.90 on July 31; sold at HK$11.48 on October 13—held for two-and-a-half months, generating a 18.87% gain. Qingdao Port: bought at HK$7.04 on May 28; sold at HK$8.135 on October 14—held for four-and-a-half months; plus accrued but unpaid dividends of HK$0.16 per share, total estimated return: 17.77%. Although both companies’ valuations were not high, their P/E and P/B percentile rankings had approached the top of their five-year ranges—prompting us this week to execute a stock-swap strategy: exchanging relatively higher-valuation stocks for lower-valuation ones. As shown in the table above, public utilities and traditional trading or manufacturing firms possess distinct valuation ceilings—due to their unique business attributes, these ceilings tend to sit lower than those of other sectors. We use five years as the reference horizon primarily because valuation cycles for most companies span roughly that duration. Regarding approximate valuation, Benjamin Graham proposed a simple formula in *The Intelligent Investor*: Intrinsic Value = Current (Normalized) Earnings × (8.5 + 2 × Expected Annual Growth Rate) The book posits that a zero-growth company’s normal P/E ratio is 8.5x, while the ‘Expected Annual Growth Rate’ refers to the investor’s forecast of the firm’s average annual earnings growth over the next 7–10 years. Using this formula, one can estimate a stock’s fair price and thereby assess whether it is over- or undervalued. Below are my interpretations of this formula: 1. The book specifies the growth rate as a 7–10 year forward expectation—implying, from another angle, that the author has implicitly capped the investment payback period at 7–10 years. In other words, the anchor P/E is set within that 7–10 year window; Graham considers 8.5 years—i.e., (7+10)/2—as the normal P/E for a zero-growth enterprise. This figure likely reflects investors’ typical expected holding period. If your target payback period is five years, substitute 5; if 20 years, substitute 20. Yet I believe a 10-year holding horizon strikes a reasonable balance for most investors. Regarding whether a firm qualifies as ‘zero-growth’, I suggest defining it as one whose earnings fluctuate within ±10%—so a decline under 10% may effectively be treated as zero growth. 2. The ‘2 × Expected Annual Growth Rate’ term is where I harbor some uncertainty. First, this growth rate should represent the average annual growth over the next 7–10 years—a figure virtually impossible to predict reliably from an investment standpoint. Naturally, one may conservatively input a low number to establish a margin of safety. For instance, although Kweichow Moutai’s 2025 growth rate may dip, assuming a 10% average annual growth over the next 7–10 years remains plausible for long-term analysis—testing, above all, the investor’s grasp of business logic.

Albemarle (ALB) Stock Appears Underpriced Following 62% 5-Year Decline

1 day ago

Albemarle's stock is deemed undervalued despite a 62% five-year decline, driven by strong Q3 lithium profits, though analysts remain split on future margin resilience.

Simply Wall St

2026-05-06

Albemarle Shares Jump as Lithium Recovery Delivers Earnings Beat

2026-09-03

Albemarle Appoints New CEO After 7 Years

2026-09-10

Albemarle, Chile Union Leaders Reach Deal; Ratification Required

2026-09-17

Albemarle Corp. Stock Outperforms Competitors on Strong Trading Day

2026-09-17

Albemarle Awards 10,867 RSUs to Chief Commercial Officer