The year 2022 has made us experience one of the worst economic crisis on the global scale, and Egypt was hit hard consequently. The value of gold and other commodities has already skyrocketed to a 100% increase thanks to the devaluation of the Egyptian Pound, which has lost about 57% of its value in seven months. Even worse, it is currently trading on the black market at higher rates.
If you have money saved in the Egyptian pound, it is too late to save its value now since everything with intrinsic value has risen against the Egyptian pound, except one thing. Yes, you guessed it right, stocks. Stocks simply are pieces of companies. If you own one stock then you own one piece. Sometimes the stock price does not reflect the real value of a company and that is your opportunity to start investing, but how can you know if a stock is undervalued? Well there are two methods; one is common sense, the other is inputting some values into an equation. I will explain every method and it is up to you to choose the one that fits you. For me I use both.
Let us start with common sense. Assume a stock has been averagely trading at a certain value, say X EGP, and the exchange rate for one USD is X EGP. By common sense, if the exchange rate for USD to EGP doubles to 2X, it must also double to 2X for the stock. If you found a stock traded at a value less than that, chances are the stock is undervalued and you should consider buying some of it. However, make sure the company itself is trustworthy, reputable and has a huge market capital.
Now let us get to the second method. First, you must be familiar with a concept called “book value” which means what you would get if the company were to shut down and liquidate all of its assets tomorrow. To know the book value of a company you must subtract its debts, also known as liabilities, from its total assets to get something called “total equity” then you divide that amount by the total number of shares outstanding and if the output is more than the actual stock price, then the company is undervalued. One thing to keep in mind is to make sure that the financial data of a company is up to date since the devaluation of the currency will of course make these assets more valuable, especially if most of these assets are not in cash.
If you look at EGX30 stocks and apply both methods to them, you will find that there are still opportunities to invest in undervalued stocks. If the currency gets devaluated again, that will make it more undervalued than it is at the current moment.
Finally, you must keep in mind that a company’s value can be determined by many factors. Companies own lands, real estate, factories and even other companies. These are factors to consider, but the most important factor is the company’s ability to grow and generate profits.
