Fundamental Analysis can aid your investment strategy
Deciding which investments make sense for you can be difficult. Sometimes it helps to go back to basics and consider the tried and true ways that investors have used to analyze investments over the years. The basic approaches are fundamental analysis and technical analysis. This article considers fundamental analysis.In fundamental analysis, investors evaluate a stock by looking at the companys financials in terms of per-share values. This allows investors to calculate how much the stocks proportional share of the business is worth. Methods of evaluation such as value, growth, income, GARP, and quality investing involve fundamental analysis. Value investingThe goal of the value investor is to buy stock at a discount to its intrinsic value what the business would be worth if it were liquidated tomorrow. In selecting investments, value investors focus on ratios that illustrate relationships between the current market price of the company and certain business fundamentals. Some examples include: Price/earnings ratios (P/E);Dividend yields above a certain absolute limit;Book value per share relative to the share price; andTotal sales at a certain level relative to the companys market capitalization or market value.Growth investingWith growth investing, the idea is to buy stock in companies with excellent potential for growth in sales and earnings. Growth investors tend to focus more on the companys value as an ongoing concern, rather than its liquidation value. Many investors plan to hold these stocks for long periods of time, although this is not always the case. Excited by new companies, new industries and new markets, growth investors normally buy companies they believe are capable of increasing sales, earnings and other important business metrics by a minimum amount each year.Income investingThere are still many people who buy stocks primarily because of their dividend-paying ability. Called income investors, these individuals tend to forgo stocks with the potential for capital appreciation in favor of high-yielding, dividend-paying companies in slow-growth industries. These investors may focus on utilities and real estate investment trusts (REITs). They may also invest in companies undergoing significant business problems whose share prices may have sunk so low that the dividend yield is relatively high.GARP investingGARP stands for growth at a reasonable price. GARP investors combine the value and growth approaches. They look for companies with solid growth prospects and current share prices that are lower than the intrinsic value of the business.One of the most common GARP approaches is to buy stocks when the P/E ratio is lower than the percentage rate at which earnings per share can grow in the future. As the companys earnings per share grow, the P/E of the company will fall if the share price remains constant. Since fast-growing companies normally can sustain high P/Es, the GARP investor is buying a company that they believe will be cheap tomorrow if the growth occurs as expected. If the growth does not come, however, the GARP investors perceived bargain can disappear very quickly.Quality investingMost investors today use a hybrid of value, growth, and GARP approaches. They look for high-quality stocks selling for reasonable prices. They share a philosophy of looking at the companys valuation and at the inherent quality of the company as measured quantitatively by ratios like return on equity (ROE) and qualitatively by the perceived competence of management.Those who do not use fundamental analysis have two major arguments against it. First, they believe this type of investing is based on exactly the kind of information everyone already knows, so they believe it provides no real advantage. The second objection is that much of the fundamental information is fuzzy or squishy it is up to the person looking at it to interpret its significance. Unless you are an expert, so the argument goes, you would be better served by not paying attention to this kind of information.However, fundamental analysis has typically yielded good results for many investors. Warren Buffett is a famously successful example. His mentor, Benjamin Graham, wrote The Intelligent Investor, a classic statement on value investing. Another professional whom Buffett admires is Philip Fisher, whose book Common Stocks and Uncommon Profits is a classic statement on growth investing.Our firm does not render legal, accounting or tax advice. Please consult your CPA or attorney on such matters.Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Dividends are not guaranteed and may be discontinued at any time. In addition, there are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions.The accuracy and completeness of this material are not guaranteed. The opinions expressed are those of Fraser M. Horn and Dudley M. Irwin and are not necessarily those of Berthel Fisher or its affiliates. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. Provided courtesy of Fraser M. Horn and Dudley M. Irwin, investment adviser representatives with Berthel Fisher in Edwards.Registered representatives of and securities offered through Berthel Fisher & Company Financial Services, Inc. (BFCFS). Member FINRA/SIPC. 1st & Main Investment Advisors is independent of BFCFS.