What is Fundamental Analysis?
Fundamental analysis can be valuable, but should be treated with caution. If you're reading a research written by a sales-side analyst, it's important to be familiar with the analyst behind the report. We all have personal biases, and every analyst has some kind of bias. There's nothing wrong with that, and research can still be invaluable. Before jumping into the deep end, find out what the ratings mean and an analyst's past performance. Company statements and press releases provide good information, but should be read with a healthy skepticism to separate the facts from the return. Press releases are not accidental; It is an important PR tool for companies.
General Steps to Key Assessment
While there is no exact method, a breakdown is presented below in the order in which the investor will move. This method uses a top-down approach that starts with the general economy and then works from industry groups to specific companies. As part of the analysis process, it is important to remember that all information is relative. Industry groups are compared with other industry groups and companies with other companies. Usually companies are compared with other companies in the same group. For example, a telecom operator (Verizon) can be compared not to an oil company (ChevronTexaco) but to another telecom operator (free gold signals SBC Corp).
First and foremost in the top-down approach will be an overview of the overall economy. The economy is like a wave, and various industry groups and individual companies are like boats. When the economy expands, most industry groups and companies take advantage of it and grow. When the economy falls, most industries and companies often suffer. Many economists associate economic expansion and contraction with the level of interest rates. Interest rates are also seen as a leading indicator for the stock market. Below is a graph of the S&P 500 and the yield of the last 10-year bond in 30 years of gold signals. Although not certain, a correlation can be seen between stock prices and interest rates. Once a scenario for the general economy has been developed, an investor can divide the economy into various industry groups.
If the forecast is for an expanding economy, then certain groups are more likely to benefit than others. An investor can narrow the space to the most suitable groups to take advantage of the current or future economic environment. If most companies are expected to benefit from an expansion, the risk to stocks will be relatively low and an aggressive growth-oriented strategy may be recommended. A growth strategy may involve the purchase of technology, biotech, semiconductor and circular stocks. If the economy is predicted to contract, an investor may choose a more conservative strategy and seek companies with a stable income focus. Defense strategy may involve the purchase of consumer products, utilities, and energy-related stocks.
To assess the potential of an industry group, an investor will want to consider the overall growth rate, market size, and importance to the economy. While the individual company is still important, the industry group is likely to have the same or greater influence on the stock price. When stocks move, they usually move in groups; there are very few weapons alone. Often times, being in the right industry is more important than having the right stock! The chart below shows the relative performance of 5 industries over a 7-month period. As the chart shows, being in the right industry can make a big difference.
In Group Narrow
Once the industry group has been selected, an investor will need to narrow the list of companies before moving on to a more detailed analysis. Investors are often interested in finding leaders and innovators within a group. The first task is to identify future trends as well as the current business and competitive environment within a group. How are companies ranked according to market share, product position and competitive advantage? Who is the current leader and how will changes in the industry affect the current balance of power? What are the barriers to entry? Success depends on having advantages such as marketing, technology and market.