Fundamental Analysis
One of the most popular ways of studying stocks is called fundamental analysis. Investors
who use this approach like to look at basic information about a company, such as the growth
of its sales and profits, in an effort to figure out what they think is the true, or "fair," value of
that company's stock. By comparing the current stock price to that fair value, you can
determine if it might be a good time to buy that stock -- or if it's a stock to avoid
Most individual investors use fundamental analysis in some way to pick stocks for their
portfolios. If you're looking for a way to build a "buy-and-hold" portfolio of stocks, made
up of companies that you can purchase and then own for years without losing too much sleep
at night, you'll probably use the methods of fundamental analysis.
Investors who use fundamental analysis usually focus on two separate approaches to picking
stocks: growth or value (or sometimes a combination of both).
Fundamental Analysis- Growth
Investors who focus on growth try to predict which companies will grow faster in the future
-- faster than the rest of the stocks in the market, or faster than other stocks in the same
industry. If you're successful in buying a company that does grow faster than other
companies, then it's likely that the price of that company's stock will increase as well, and
you can make a profit.
The stock of a company that grows its earnings and revenues faster than average is known as
a growth stock. These companies usually pay few or no dividends, since they prefer to
reinvest their profits in their business.
PAYX, KO, MSFT
Fundamental Analysis- Growth
Growth Investing Guidelines
1.Strong Historical Earnings Growth
2.Strong Forward Earnings Growth
3. Is Management Controlling Costs and Revenues? Is the EPS growing?
Fundamental Analysis- Value
Value investors look for stocks that have been overlooked by other investors and that may
have a "hidden value." These companies may have been beaten down in price because of
some bad event, or may be in an industry that's looked down upon by most investors.
However, even a company that has seen its stock price decline still has assets to its name –
buildings, real estate, inventories, subsidiaries, and so forth. Many of these assets still have
value, yet that value may not be reflected in the stock's price.
Value investors look to buy stocks that are undervalued, and then hold those stocks until the
rest of the market -- hopefully -- realizes the real value of the company's assets.
Fundamental Analysis- Value
Value Investing Guidlines
What do value investors look for in a potential investment? Here are some guidelines gathered
from a variety of value investors. Investors should settle on a formula that works for them,
but it will probably include as a minimum these elements:
A PEG of less than one may indicate the stock is undervalued.
A Debt to Equity Ratio of less than one.
Strong earnings growth over an extended period. A realistic number might be in the
6% - 8% range over 7 to 10 years.