Undervalued

A comparison between two numbers of very different kinds. One is the price, which is observed and is not in dispute. The other is a value, which is calculated, and calling something undervalued asserts that the second exceeds the first. The word therefore says as much about the method behind the estimate as it does about the market, and it belongs to fundamental analysis rather than to anything read from a chart.

The methods differ by asset. A company can be valued by discounting the cash it is expected to generate, by comparing a multiple such as price against earnings with its peers or with its own history, or by what its assets would fetch. A currency is more often assessed against purchasing power parity, which compares what a sum buys in two economies, or against a model of the real exchange rate consistent with a country's external balance. No threshold exists at which a market becomes officially undervalued, and no authority publishes one.

Two confusions are worth separating. The first is with oversold, which is an indicator reading about how far and how fast a price has moved over a lookback window and says nothing whatever about worth: a market can be one without being the other. The second is that the word contains no timing. A price below an estimate can stay below it for years, and the estimate can simply be wrong. Beneath both sits an argument that has not resolved in decades: one tradition holds that prices routinely depart from value and eventually return to it, another that public information is already in the price so the gap is mostly an artefact of the assumptions used to compute it. Both positions are consistent with the record, which is why the disagreement persists.