Selecting Stocks in 4 Steps Using Fundamental Analysis

Designing and implementing a system to evaluate real corporate value is absolutely crucial if you are a stock investor. Here are the four (4) steps that any investor should follow before buying any stock.

 

I) Evaluating the Industry

First of all, you must define the core industry of any company by determining factors such are:

1) Level of Competition (local & global)

2) Current Growth Rate & Forward Growth Rate

3) Expected Changes in the level of Technology

4) Industry Leaders

5) Recent Acquisitions

6) Future Industry Threats and Risks

7) Macroeconomic and Monetary Conditions

 

II) General Business & Management Evaluation

In the second step, you must analyze factors such as the quality of the management and the location(s) of the company. Strong management is the most valuable asset of any company. The quality of the management can be determined by factors such as past performance and the accuracy of past forecasts. A great investor sometimes said, "Don't buy a stock if you are not sure about the criminal record of the management". Cruel words but true.

 

III) Evaluating the Company's Balance Sheet

Today the balance sheet of every listed company can be found on the internet. First, you must find that the company's symbol and at which exchange it is listed. Second, visit that exchange's official website and search for the company using the symbol. The balance sheet should be there. Alternatively, go directly to the company's website and search for the -Investor Relations- page.

By analyzing a balance sheet or/and similar informational sources, you may answer questions such are:

1) What are the sales, profits and profit margins?

2) How that company generates cash?

3) What is the current debt level of that company? (very important as concerns short-term liabilities)

4) How much cash does this company hold? (cash and equivalent are very important as a source of funding for future investment decisions or/and new acquisitions. It is important because high cash means avoiding the issuing of new share capital -which is bad news for investors as the number of shares will increase too)

4) How much does that company invest annually?

5) Are there any real growth opportunities for that company in the future?

6) What is the level of the current and of the forward P/E ratio of that company?

6) What is the relation between that company's P/E and the competition's average P/E?

7) Does this company own any kind of hidden assets? (for example unused land)

 

 

IV) Evaluating the Company's Strategy

Last but not least comes the strategic analysis. Actually, any strategy is oriented towards the future, so when analyzing a company's strategy mistakes cannot be avoided.

Here are some key strategic questions:

1) Does this company implement a strong strategy and a vision for the future?

2) How effective is this strategy?

3) Do competitors implement more aggressive strategies?

4) What is that company's competitive advantage? (cost leader, technological differentiator etc)

5) Do other competitors hold better competitive advantages?

6) What are the risks involved in the company's business model?

 

Final Thoughts:

These four steps are oriented purely on fundamentals and do not include the use of technical analysis. Actually, good investors should gather all the information they can, including technical analysis.

 

■ Giorgos Protonotarios,

for Trading Center