UNDERVALUED

A *stock* price which is perceived to be "too low" or cheap as indicated by a particular valuation model. For instance, some might consider a particular company's stock price cheap if the company's price/earnings ratio is much lower than the industry average. However, caution needs to be exercised. Using the current P/E ratio is an imperfect way to value securities (we need to consider the expected future stream of earnings and discount by the appropriate risk adjusted rate). Hence, when one talks of undervaluation or overvaluation you are implicitly assuming some model of valuation. It is always possible that the security is valued correctly and the you apply model is wrong.