There may be many such stocks currently in the market that have good future growth potential. But what if they are already trading at high valuations because they have good growth prospects. In such cases there won’t be great advantage of investing in stocks at high valuations.So what is important here is to identify those hidden gems that are currently trading at cheap valuations compared to the actual value they could command.

In this article we will analyze the principles of identifying those under-valued stocks with good growth potential and also identify the actual stocks that are trading at cheap valuations in the Indian stock markets.

Buying stocks should be just like buying things in a store. You should buy them cheap when no one is paying attention to them and sell them when they become over-valued.

The valuation of a stock should be determined based on the following factors.

1. Buying Stocks with Low Price in relation to its Earnings
2. Buying Stocks with Low Price in relation to its Book-Value
3. Buying Stocks with Low Price in relation to Liquidation Value
4. Buying Stocks Using Benjamin Graham’s Magic Multiple.

1. Buying Stocks with Low Price in relation to its Earnings - Stocks are are bought at low price/earning ratios (P/E) offer higher earning yields compared to stock bought at high P/E over a long period of time, provided the stock has good growth potential as well.  The earnings yield is the returns that the investors receive if all the profits were paid as dividends. Typically stocks that are trading at less than 10 P/E offer good value.

2. Buying Stocks with Low Price in relation to its Book-Value - Another ratio that is commenly used to value stocks is price/book-value (P/BV). This is calculated  by dividing the market price of a share with the book-value per share. Book value is equal to the share holders equity, which means total assets of the company minus total liabilities of the company divided by number of outstanding stocks. Stocks priced at low P/BV offer better results that those of high P/BV assuming all other parameters are same.

3. Buying Stocks with Low Price in relation to Liquidation Value - The idea here is to buy stocks ata cost less than their Net Current Asset Value. Here we take only current assets (not fixed  assets)  like cash, receivables, inventory etc. that can liquidated quickly.  This technique is successfully employed the value-investing guru Benjamin Graham. Usually, there won’t be many (if any) companies that will tradefor less than their per-share liquidation value.So the idea is topick stocks that offer good-value in relation to this parameter.

4. Buying Stocks Using Benjamin Graham’s Magic Multiple - Benjamin Graham’s Magic Multiple is the product of P/E and P/BV. So this takesboth into consideration.So buying stocks that are trading at low number of this multiple offer good value. Graham himself put upper limit forthis ratio as 22.5 - upper limits of 15 for P/E and 1.5 for P/BV

So are there any stocks that can be considered as good ‘value stocks‘ on all these parameters now in Nov 2010 in Indian Stock Market.