Its unlikely that I will ever be the best fundamental analyst in the world. I have a hard enough time if my ATM balance is different than my checking balance, so getting too far beyond that and I am in a grey area. However, as a trader I do think its important to have some understanding of the fundamentals of a company you are looking for. Technical analysis is great, and it is by far the strongest point of my own trading, but if that is all your looking at you are not getting nearly as much of the picture as you could be or should be.
This is just going to be a very basic piece on how to approach fundamental analysis, in terms of learning how to do some basic work on your own, what to look for and growing as a trader and analysis from that. Everyone has people who help them in life, and in terms of fundamental analysis I have to thank my business partner Anthony. My early approach was fairly simple, I would look at the EPS, make sure it was growing and dance the happy dance if the ESP “looked good” and so did my fundamental analysis. As crude as that sounds, its still more than most technicians do, and I do think that has a negative result on the results they could have if they are a longer term trader, say beyond a week or two.
I've found that some of my best stocks are going to be the ones showing the best EPS growth at the time I buy them and during the time I own them (whoa is me if the EPS slows down while I own them), so the EPS is a good place to start. Personally I like to see a company that can grow ESP at 25% or more on a quarter over quarter basis. It's best if the company has a history of growing its EPS, and even better if the last several quarters have seen accelerating growth in that number. Now, before you get too excited, there are all kinds of numbers showing HUGE EPS gains because in the last quarter they lost money or only made 1 cent. I tend to throw those away except in special cases, until you know what your doing you should not allow for special cases, its just asking to be kicked between the legs. The next thing I look at is how close does the Revenue growth come to the EPS growth. You see a lot of companies that are growing ESP at 100% while Revenue only grew at 10%. Having run my own business for some time I always ask myself, how could I double my profits while barely growing my revenue at all? Answer, I probably could not, and if I could it would not be sustainable growth, and its no different for most other companies either, so if the EPS numbers and the Revenue numbers are out of whack, then I stay away. Simple things for simple people you know.
The next few things I like to look at are the Return on Investment numbers (ROI). This tells us how effectively the company is putting its money to work, more is better in this case. I like to see above 10% for sure, and ideally better than twenty. I also consider the number of analysts who follow the stock to be a fundamental consideration, although this is more about the stock than the company, and also things like the number of fund managers who own it as well. The less well known your name is the better your chances of making a good bit of money on a stock.
The above ideas are all pretty simple places to start. As you move along your going to want to actually look at the company. When I started, again using the simple things for simple people approach, I would just look at the companies growth rate, lets say its 40%. I would next dig around to see what its competitors where doing. After I have that info I ask myself, well how are they doing it, and can it continue? What kind of hardships might they run into, what kind of success might they have. Why? Be like a two and a half year and and ALWAYS ASK WHY! Next look at the dominant player in the group and simply ask yourself “How did it get so big?”. Dig, read the reports and figure it out. It gives you a sense of the history of that company, what happened and the language that was used as they grew rapidly. Its a good way to be able to spot the same thing in the future.
Finally feel free to call the companies directly and ask questions. You should do this on most stocks you plan to own for any period of time. I started off calling mega cap names like Walmart, Citi, Ford etc just to get used to asking questions and learning about a company. I figured that I was going to ask some dumb questions, but they have a lot of people calling them every day, so I doubt I ever won the idiot of the day award, although I'm sure I came close. Even if I did, its not like those people are my neighbors or are every going to remember me anyway.
Anyway, this is just some basic stuff that should get you started. I hope you find it helpful. Feel free to fire away at the questions.
This is just going to be a very basic piece on how to approach fundamental analysis, in terms of learning how to do some basic work on your own, what to look for and growing as a trader and analysis from that. Everyone has people who help them in life, and in terms of fundamental analysis I have to thank my business partner Anthony. My early approach was fairly simple, I would look at the EPS, make sure it was growing and dance the happy dance if the ESP “looked good” and so did my fundamental analysis. As crude as that sounds, its still more than most technicians do, and I do think that has a negative result on the results they could have if they are a longer term trader, say beyond a week or two.
I've found that some of my best stocks are going to be the ones showing the best EPS growth at the time I buy them and during the time I own them (whoa is me if the EPS slows down while I own them), so the EPS is a good place to start. Personally I like to see a company that can grow ESP at 25% or more on a quarter over quarter basis. It's best if the company has a history of growing its EPS, and even better if the last several quarters have seen accelerating growth in that number. Now, before you get too excited, there are all kinds of numbers showing HUGE EPS gains because in the last quarter they lost money or only made 1 cent. I tend to throw those away except in special cases, until you know what your doing you should not allow for special cases, its just asking to be kicked between the legs. The next thing I look at is how close does the Revenue growth come to the EPS growth. You see a lot of companies that are growing ESP at 100% while Revenue only grew at 10%. Having run my own business for some time I always ask myself, how could I double my profits while barely growing my revenue at all? Answer, I probably could not, and if I could it would not be sustainable growth, and its no different for most other companies either, so if the EPS numbers and the Revenue numbers are out of whack, then I stay away. Simple things for simple people you know.
The next few things I like to look at are the Return on Investment numbers (ROI). This tells us how effectively the company is putting its money to work, more is better in this case. I like to see above 10% for sure, and ideally better than twenty. I also consider the number of analysts who follow the stock to be a fundamental consideration, although this is more about the stock than the company, and also things like the number of fund managers who own it as well. The less well known your name is the better your chances of making a good bit of money on a stock.
The above ideas are all pretty simple places to start. As you move along your going to want to actually look at the company. When I started, again using the simple things for simple people approach, I would just look at the companies growth rate, lets say its 40%. I would next dig around to see what its competitors where doing. After I have that info I ask myself, well how are they doing it, and can it continue? What kind of hardships might they run into, what kind of success might they have. Why? Be like a two and a half year and and ALWAYS ASK WHY! Next look at the dominant player in the group and simply ask yourself “How did it get so big?”. Dig, read the reports and figure it out. It gives you a sense of the history of that company, what happened and the language that was used as they grew rapidly. Its a good way to be able to spot the same thing in the future.
Finally feel free to call the companies directly and ask questions. You should do this on most stocks you plan to own for any period of time. I started off calling mega cap names like Walmart, Citi, Ford etc just to get used to asking questions and learning about a company. I figured that I was going to ask some dumb questions, but they have a lot of people calling them every day, so I doubt I ever won the idiot of the day award, although I'm sure I came close. Even if I did, its not like those people are my neighbors or are every going to remember me anyway.
Anyway, this is just some basic stuff that should get you started. I hope you find it helpful. Feel free to fire away at the questions.
