Do economic recessions or downturns typically increase the number of undervalued stocks in the market?

How Economic Downturns Can Uncover Hidden Value: A Closer Look at Undervalued Stocks Summary: This article explores the lesser-discussed mechanics of how economic downturns can dramatically reshape the pool of undervalued stocks in the market. Drawing on real-world experience, regulatory insights, and a hands-on walkthrough of stock screening, we go beyond the basics to illustrate not only why undervalued opportunities proliferate during recessions, but also how investors can reliably identify them. Comparative data on “verified trade” standards is included, offering an international perspective on transparency and fair valuation. Unlocking Opportunity in Crisis: Addressing the Real Problem If you’ve ever stared at your investment portfolio during a market crash and wondered, “Am I missing out on hidden gems or just catching falling knives?”—you’re not alone. During my time as a junior analyst at a regional brokerage, this dilemma was painfully real. I found myself sifting through pages of red-tinted charts, trying to make sense of what was truly undervalued versus what was just plain risky. What I discovered—often the hard way—was that economic downturns don’t just increase the number of stocks trading at low prices. They fundamentally alter the criteria for what’s considered undervalued, and they test every assumption you have about value investing. Step-by-Step: Identifying Undervalued Stocks in a Downturn 1. Why Downturns Create More “Undervalued” Stocks Let’s get this out of the way: not every cheap stock is a bargain. In recessions, panic selling, forced liquidations, and downgraded earnings projections all conspire to push prices below historical norms. As the OECD has noted in its Financial Market Trends report, broad-based declines often mean even fundamentally sound companies trade at a discount due to market-wide risk aversion. I remember in March 2020, I ran a screen for S&P 500 stocks with a price-to-earnings (P/E) ratio below 10—usually a sign of value. The list exploded overnight. But, here’s the catch: a lower P/E during a crisis doesn’t always spell opportunity. Sometimes earnings are about to collapse, or the business model is facing existential risk. For example, airline stocks looked “cheap” by many metrics during the pandemic crash, but the underlying risk was enormous. (I lost a small but memorable chunk on one regional airline, thinking it simply looked too cheap to ignore. Lesson learned.) 2. Hands-On Screening: A Real Example from 2022 Here’s what I do differently now. During the last major downturn, I used the free screener on Finviz to look for large-cap stocks (market cap > $10B), P/E below 15, and debt/equity below 0.5. Screenshot below: Surprisingly, I found consumer staples like Procter & Gamble and Colgate-Palmolive popping up, companies that rarely look ‘cheap’ outside of a panic. My mistake a few years prior was only looking at the numbers, not the business quality. This time, I cross-checked recent earnings calls (available on company IR sites) and regulatory filings from the SEC EDGAR database. The difference? The stocks that maintained positive cash flow and solid dividend records during the crisis ended up rebounding fastest once the market stabilized. 3. Regulatory Standards: How “Verified Trade” Differs Across Borders During a recession, transparency and credible reporting become critical. Here’s a comparative table of “verified trade” standards (relevant for cross-border investment and ADRs): Country/Region Standard Name Legal Basis Enforcement Agency US SEC Regulation S-X Securities Exchange Act of 1934 SEC EU MiFID II Directive 2014/65/EU ESMA (European Securities and Markets Authority) China CSRC Trading Verification Standards Securities Law of the PRC CSRC Global WTO TFA Article 10 WTO Trade Facilitation Agreement WTO/WCO For more, see the SEC Regulation S-X and MiFID II documentation. The standards may look similar, but in practice, disclosure quality and enforcement vary. In 2022, I had to triple-check data from a dual-listed company because its US and European filings didn’t quite match up. That’s not unusual, and it can have a huge impact on how “undervalued” a stock appears to global investors. 4. Expert Insights: What the Pros Say (And What They Get Wrong) I once sat in on a CFA society webinar where a senior portfolio manager quipped, “A recession is like a clearance sale, but you have to know if the merchandise is actually in season.” That stuck with me. The pros often focus on balance sheets and cash flow, but in practice, it’s the subtle stuff—like management’s tone on earnings calls or changes in auditor’s notes—that separate the truly undervalued from the merely discounted. For example, Warren Buffett’s 2008-09 annual letters (see Berkshire Hathaway’s 2008 letter) emphasized looking for “businesses you would want to own forever,” even when everyone else was selling. That mindset helped me avoid some of my earlier mistakes chasing “cheap” cyclical stocks with no real moat. 5. Simulated Case: US vs EU Trade Verification in a Market Crisis Let’s say you’re evaluating a dual-listed pharmaceutical company during a sharp downturn. Its US shares look extremely cheap, but its European listing shows a higher valuation due to stricter MiFID II disclosure. You dig into both annual reports: the US version glosses over litigation risks, while the EU report spells them out (thanks to ESMA’s enforcement). In this case, the “undervaluation” in the US is partly a mirage—without digging into both, you could get burned by unknown liabilities. This is precisely why, during the 2020 COVID crash, some investors got trapped in seemingly undervalued foreign ADRs, only to discover massive unresolved risks months later (see FT coverage). Conclusion: What I Learned (And Still Get Wrong) So, do economic downturns increase the number of undervalued stocks? Statistically, yes—screens light up with new “bargains.” But if you stop there, you’ll likely make the same mistakes I did at first: chasing low multiples without understanding the full risk picture. The real edge comes from combining rigorous screening with a healthy skepticism, close reading of regulatory filings, and—if possible—listening to how management handles tough questions on earnings calls. Next time the market tanks, don’t just run a filter and hit buy. Pause, dig into the filings, check how the company is regulated in each jurisdiction, and ask yourself: is this low price a temporary discount, or are you buying into a problem you didn’t see coming? If you want to go deeper, try comparing companies’ filings across different verified trade standards—sometimes, the “gap” itself is the best clue to hidden risks (or hidden value). If you’ve got your own war stories about value investing in a downturn, or want a walkthrough for screening international stocks, drop me a line. I’m always keen to swap notes—sometimes the best lessons (and mistakes) don’t make it into the textbooks.

Martina's answer to: How does economic downturn influence the number of undervalued stocks?

How Economic Downturns Can Uncover Hidden Value: A Closer Look at Undervalued Stocks

Summary: This article explores the lesser-discussed mechanics of how economic downturns can dramatically reshape the pool of undervalued stocks in the market. Drawing on real-world experience, regulatory insights, and a hands-on walkthrough of stock screening, we go beyond the basics to illustrate not only why undervalued opportunities proliferate during recessions, but also how investors can reliably identify them. Comparative data on “verified trade” standards is included, offering an international perspective on transparency and fair valuation.

Unlocking Opportunity in Crisis: Addressing the Real Problem

If you’ve ever stared at your investment portfolio during a market crash and wondered, “Am I missing out on hidden gems or just catching falling knives?”—you’re not alone. During my time as a junior analyst at a regional brokerage, this dilemma was painfully real. I found myself sifting through pages of red-tinted charts, trying to make sense of what was truly undervalued versus what was just plain risky. What I discovered—often the hard way—was that economic downturns don’t just increase the number of stocks trading at low prices. They fundamentally alter the criteria for what’s considered undervalued, and they test every assumption you have about value investing.

Step-by-Step: Identifying Undervalued Stocks in a Downturn

1. Why Downturns Create More “Undervalued” Stocks

Let’s get this out of the way: not every cheap stock is a bargain. In recessions, panic selling, forced liquidations, and downgraded earnings projections all conspire to push prices below historical norms. As the OECD has noted in its Financial Market Trends report, broad-based declines often mean even fundamentally sound companies trade at a discount due to market-wide risk aversion. I remember in March 2020, I ran a screen for S&P 500 stocks with a price-to-earnings (P/E) ratio below 10—usually a sign of value. The list exploded overnight. But, here’s the catch: a lower P/E during a crisis doesn’t always spell opportunity. Sometimes earnings are about to collapse, or the business model is facing existential risk.

For example, airline stocks looked “cheap” by many metrics during the pandemic crash, but the underlying risk was enormous. (I lost a small but memorable chunk on one regional airline, thinking it simply looked too cheap to ignore. Lesson learned.)

2. Hands-On Screening: A Real Example from 2022

Here’s what I do differently now. During the last major downturn, I used the free screener on Finviz to look for large-cap stocks (market cap > $10B), P/E below 15, and debt/equity below 0.5. Screenshot below:

Finviz Stock Screener Example

Surprisingly, I found consumer staples like Procter & Gamble and Colgate-Palmolive popping up, companies that rarely look ‘cheap’ outside of a panic. My mistake a few years prior was only looking at the numbers, not the business quality. This time, I cross-checked recent earnings calls (available on company IR sites) and regulatory filings from the SEC EDGAR database. The difference? The stocks that maintained positive cash flow and solid dividend records during the crisis ended up rebounding fastest once the market stabilized.

3. Regulatory Standards: How “Verified Trade” Differs Across Borders

During a recession, transparency and credible reporting become critical. Here’s a comparative table of “verified trade” standards (relevant for cross-border investment and ADRs):

Country/Region	Standard Name	Legal Basis	Enforcement Agency
US	SEC Regulation S-X	Securities Exchange Act of 1934	SEC
EU	MiFID II	Directive 2014/65/EU	ESMA (European Securities and Markets Authority)
China	CSRC Trading Verification Standards	Securities Law of the PRC	CSRC
Global	WTO TFA Article 10	WTO Trade Facilitation Agreement	WTO/WCO

For more, see the SEC Regulation S-X and MiFID II documentation. The standards may look similar, but in practice, disclosure quality and enforcement vary. In 2022, I had to triple-check data from a dual-listed company because its US and European filings didn’t quite match up. That’s not unusual, and it can have a huge impact on how “undervalued” a stock appears to global investors.

4. Expert Insights: What the Pros Say (And What They Get Wrong)

I once sat in on a CFA society webinar where a senior portfolio manager quipped, “A recession is like a clearance sale, but you have to know if the merchandise is actually in season.” That stuck with me. The pros often focus on balance sheets and cash flow, but in practice, it’s the subtle stuff—like management’s tone on earnings calls or changes in auditor’s notes—that separate the truly undervalued from the merely discounted. For example, Warren Buffett’s 2008-09 annual letters (see Berkshire Hathaway’s 2008 letter) emphasized looking for “businesses you would want to own forever,” even when everyone else was selling. That mindset helped me avoid some of my earlier mistakes chasing “cheap” cyclical stocks with no real moat.

5. Simulated Case: US vs EU Trade Verification in a Market Crisis

Let’s say you’re evaluating a dual-listed pharmaceutical company during a sharp downturn. Its US shares look extremely cheap, but its European listing shows a higher valuation due to stricter MiFID II disclosure. You dig into both annual reports: the US version glosses over litigation risks, while the EU report spells them out (thanks to ESMA’s enforcement). In this case, the “undervaluation” in the US is partly a mirage—without digging into both, you could get burned by unknown liabilities. This is precisely why, during the 2020 COVID crash, some investors got trapped in seemingly undervalued foreign ADRs, only to discover massive unresolved risks months later (see FT coverage).

Conclusion: What I Learned (And Still Get Wrong)

So, do economic downturns increase the number of undervalued stocks? Statistically, yes—screens light up with new “bargains.” But if you stop there, you’ll likely make the same mistakes I did at first: chasing low multiples without understanding the full risk picture. The real edge comes from combining rigorous screening with a healthy skepticism, close reading of regulatory filings, and—if possible—listening to how management handles tough questions on earnings calls.

Next time the market tanks, don’t just run a filter and hit buy. Pause, dig into the filings, check how the company is regulated in each jurisdiction, and ask yourself: is this low price a temporary discount, or are you buying into a problem you didn’t see coming? If you want to go deeper, try comparing companies’ filings across different verified trade standards—sometimes, the “gap” itself is the best clue to hidden risks (or hidden value).

If you’ve got your own war stories about value investing in a downturn, or want a walkthrough for screening international stocks, drop me a line. I’m always keen to swap notes—sometimes the best lessons (and mistakes) don’t make it into the textbooks.