Using Fundamental Analysis for Trading Stocks
Fundamental analysis, the study of profits, revenue, income,
assets, etc. etc. It was the mainstay of stock market investing
for decades and decades. Finding a diamond in the rough, was
what investors looked for, it is what mutual fund managers use
today as their main tool. It is what is done by hundreds, if not
thousands of brokerage houses, stock market investor services,
and mutual fund managers every day of their lives. Numbers
poured over, fed into software programs, then analyzed again. So
much so that there is not one single fundamental analysis
surprise left to be found in large cap stocks. That is so
fundamental to the success of our large cap philosophy
(www.livingonlargecaps.blogspot.com) that it bears repeating
again. There is nothing new to be learned in fundamental
analysis of large cap stocks. Everything is already known. I
suppose we should thank the countless analysts who put in
countless hours fundamentally analyzing the numbers for us so we
don't have to. Because without them, we would have no beginning
point. So is that to say fundamental analysis has a purpose? Of
course it does. Do we use it? You bet. It is one of the first
things we do use. We use in it screens, and we also use
analyst's recommendations that are based largely on fundamental
analysis. We buy no stock without corroboration of analyst's
reports, and many of our screens have an analyst's reports
factor to them. So in a sense fundamental analysis is THE most
important factor of our selecting stocks. Without a good report
from fundamental folks, we don't look any further at the stock.
We know stock analysts also have opinions about where the market
is heading, and about the sectors as well. We like that too. We
want to be where the action is. An exceptional fundamental stock
will not move, if people are not focusing on it. And there is
the rub with fundamental analysis, and that is why
fundamentalist either make lousy traders or don't believe in
trading. They are long term investors, philosophically superior
to technicians in their way of thought. But stocks only move if
they are the focus of traders. (traders for our purposes could
be mid-term speculators as well, which frankly is probably where
we fit in.) So reading an analyst report, or with large caps you
get the benefit of a pool of analyst's reports, gives you an
idea whether or not the stock will be moving in the near future
(3-6 months.) A stock that is rated a hold is likely not to do
much of anything rather than track the market or the sector. A
stock that is rated a sell, likely has already tanked. But a
stock that is rated a buy, is worthy of a technical look. Do we
analyze rates of growth, % of debt, stuff like that? Nope, it
has already been done. Our job is to find the hot sectors, and
the hot large cap stocks in that sector. And then take those and
see if they are poised to move.. Long term moves of an
individual stock or the market in whole is a process of thought.
But every wiggle and waggle along the way is a process of
emotion. A stock poised to rise, based on solid fundamental
analysis also needs to have emotion behind it, to actually rise
in our time frame. We are not interested in holding a stock with
15% growth rates for a year to see if that results in a 15%
stock price increase. The fact of the matter is that stock is
going to rise and/or fall 15% in a year's time no matter what.
But if we know that it has received high marks for it's
fundamentals, and then look at its charts and see technically it
is also very healthy then we have something. A stock that does
not fair well through analyst's reports is not even worhty of
our looking at its' chart. There are so many options in large
cap stocks that we want EVERY advantage we can get. We want
every selection to be a winner. When your average trade only
nets you 4%, you cannot afford to be wrong.