How to find undervalued ASX shares to buy now and hold in 2023

Now might be a prime chance to load up on undervalued ASX shares, but how can an investor identify them?

| More on:
A businessman holding a butterfly net looks around hoping to snare a good ASX share investment

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Identifying the cream of the crop trading at bargain basement prices is the goal when searching for undervalued ASX shares. Locating those overlooked and underappreciated high-quality businesses is how many wealthy investors have made their millions.

While the greats — such as Warren Buffett — make this process look easy, it can be challenging. Fortunately, the erratic gyrations of Mr Market (or Ms!) can momentarily make this task much easier than usual.

The recession panic has increased the amount of indiscriminate selling. That means some absolute long-term gems could be found among beaten-down ASX shares.

Secret sauce to finding great ASX shares

There are tens of thousands of publicly listed companies around the world. It can be an incredibly arduous task to sort through opportunities without some form of system. That's why focusing on a limited number of traits can be helpful to bring only top-tier companies to the table.

At a very high level, there are two interconnected factors that can put a company out of business — competition and funding. These two aspects grow all the more critical during cloudy economic times. The fight to survive becomes more fierce, and the funding tap runs dry.

For example, if consumers begin to drastically cut down on discretionary spending, every ASX consumer discretionary share will be competing for a share of a more limited pool of dispensable income. Unsurprisingly, much of this market area has fallen over the past year as the economy tightens.

TradingView Chart

That's why the gross profit margin can be worth checking. A company with a high gross margin — that is its revenue minus the cost of goods sold converted to a per cent — can be suggestive of a business with pricing power.

An ASX share with a thicker gross margin than its peers has more wiggle room during pressing times.

The other area of the company to investigate is its balance sheet. As Peter Lynch once said, "Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets."

If an ASX share has considerable cash behind it, it can fund itself even through unprofitable periods. The cost of capital plays a major role in long-term shareholder returns. For those high-quality businesses loaded with cash, their capital costs are minimal.

It will still be bumpy

The S&P/ASX 200 Index (ASX: XJO) is already up 7.1% so far in 2023. Amazingly, that means the losses of last year have already been erased for Aussie index investors. However, the year is far from over, and we have yet to discover whether the world's central banks can coordinate a 'soft landing'.

There is a chance that interest rates end up going higher than expected. Spending could deteriorate more than expected. Even though the economy appears to be on a solid footing, there are always risks that could cause it to falter… but don't confuse volatility with risk.

If you can identify undervalued ASX shares, volatility should be embraced. The impulsive nature of markets could present an opportunity to build these positions at abnormally low prices.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

Man holding out Australian dollar notes, symbolising dividends.
Dividend Investing

Buy these high-yield ASX shares for major passive income in 2025 and beyond

Let's see why analysts think these shares could be great buys for income investors.

Read more »

A happy elderly woman smiles and cheers as she looks at good investment news on her laptop.
Dividend Investing

2 ASX dividend champions that never cut payouts

These two dividend stocks have consistently rewarded investors. 

Read more »

Happy couple enjoying ice cream in retirement.
Dividend Investing

Aiming for rock-solid retirement income? I'd buy these two ASX shares

These stocks offer compelling levels of income for retirees.

Read more »

Australian dollar notes in the pocket of a man's jeans, symbolising dividends.
Dividend Investing

Invested in ASX MOAT or other VanEck ETFs? It's dividend day!

Show us the money!

Read more »

A woman presenting company news to investors looks back at the camera and smiles.
Blue Chip Shares

2 of the best ASX 200 blue chip shares to buy now

Bell Potter sees these as the creme de la creme right now.

Read more »

Person pointing at an increasing blue graph which represents a rising share price.
Growth Shares

What to buy now with the ASX at a record high

Analysts think these shares could still rise strongly from current levels.

Read more »

A couple working on a laptop laugh as they discuss their ASX share portfolio.
Dividend Investing

Here are 2 ASX income stocks with yields above 7%

These businesses are providing investors with significant income.

Read more »

Man holding fifty Australian Dollar banknote in his hands, symbolising dividends, symbolising dividends.
Dividend Investing

Want passive income? Check out these ASX dividend shares

Analysts think these shares could be perfect for passive income investors.

Read more »