Financial Zip

Learning how to research a company is so vital to how your stock picking and how your overall portfolio performs. I have to admit for me it is good to know that a company that I am buying is fundamentally sound. Now, because the stock market has risk and volatility in it, a stock might have stretches that it doesn’t perform well. There are multiple reasons, bull market, bad short term news etc… However, if you do your homework, and find a solid company the chances of that business being profitable and giving good returns on the stock can be very high.

What is it?

When investing in stock it is a good idea to know what you are getting yourself into. Fundamental Analysis really tries to determine the underlying financial factors that affect the business the company conducts. In other words it really looks at the health of the company and its potential to grow. It also answers a number of questions like:

Is it a strong company?
Does it have the ability to make money?
Can it pay its obligations?

What you are doing is using a toolbox of different techniques to find out the fundamental
question; Is the company, is the stock a good investment? That is what it boils down to.

You are buying a business.

When you are looking at stock most people see just that a stock. In reality you are buying a business that has products and makes money, has employees the whole lot. Don’t you think you need to know what the company does? Absolutely! Understand that a business is about selling something and you want to know as an investor how that product sells. If it sucks and the sales and earnings dive you obviously it is not a good company. You need to know what that product is or what the brand is about. The more you know the better informed you’ll be and the better decisions you will be able to make. So with that let’s take a look at how you can determine the fundamentals of the company and where to research it.

Things to look for.

The first thing to do is to find a place to research the company. If you are more like an accountant you can request a financial statement directly from the company. For me that is a little too tedious and I use MSN Money to do my research. The reason I do is it has clear and very concise information about the company. The financials, what it does, all the stock quotes, it even has links to the company’s site so you can still request their financial information. So here are some things to look for. I will give you links at the end of each section as an example to view that data. I will be using Potash Corp (POT) as an example.

Volume

Volume is an indication of liquidity. Liquidity means how fast you can turn around and sell something. Say you have a stock that is trading around 25,000 shares a day. You might be stuck with a stock price you don’t want because it doesn’t trade often enough. When it comes to putting money on the line in a stock you want to be able to get out of it quickly if it takes a dive. It is also an indication of a strong stock. Most big strong companies trade at high volumes. This indicates demand which is a good thing. The bench mark for volume you want to look for is at least 500,000 shares up to 1 million or more. GE the mega corporation trades 19 million shares a day on average. Main point here 500,000 or more. See Volume (POT)

EPS and ROE
Earning Per Share indicates the profitability of the company. Basically it is the

Income of the Company
Outstanding Shares

With earning per share you are looking to find a stock that has 3+ yearsoif growth above 25% .

ROE stands for return on equity this is another indication of profitability of the company. It is different form EPS because it is measuring the shareholders equity (how much money overall shareholders have in stock) verse the income of the company. This is probably one of the most important fundamental numbers. You want to see an ROE up above 17% if it’s lower it is not returning enough for what you have invested as a share holder. EPS and ROE of (POT)

Accumulation

Accumulation is another word for how much stock are these big investment companies are buying up. Regular stockholders are not able to trade the amount of stock that these “institutional investors” are. They trade millions of stock per transaction. This is an important indicator of the popularity of a stock. If you see that a large investment bank is buying up stock. The rationale is I need to buy because something is causing that stocks value to increase. If those investors don’t have a large percentage of holdings in that stock, it may not be the best time to look or get into that stock. So the percentage you want to look for is around 70% of institutional ownership. Institutional ownership (POT)

Earnings

Earnings are the life blood of the company. If you have no sales and no product moving a company will have bad earnings. There is yearly and quarterly reporting of earnings. You want to have good quarterly earnings roughly above 20% or more. The best is to look at yearly earnings above +25%. Now these are estimates and sometimes they are exceeded and sometimes not. So be sure to look at the previous 3 years of earnings to get an idea of how the company is growing. Earnings (POT) look at the earnings growth rate.

Financial Statements

Under the financial Statements there is a tab that says 10 year summary. There are 2 things that I look for on this page. 1. Sales. If over the last 10 years the sales have steadily increased or especially in the last 5 years this is a good sign of a strong company. 2. Income. The same thing is true with income as you see it rise and that it is not erratic this is another good strong indication of the strength of the company. After all you want a company that is going to be profitable in the future and these are good indications of that. Financial Statements (POT)

Intangibles

These are not necessarily fundamentals but have a very big impact on a stocks value short term and long term.

Sectors

Each business has a sector of the economy it rides in. You have financials, agricultural, mining and the list goes on and on. Some websites have as many as 30 sectors listed. What you want to look for in a stock when you buy is what sector it is in, and you want to choose one of the top 6 performing sectors this not always the case that is why this is an intangible. But you will see fundamentally strong stocks in the top sectors. Go to Barcharts.com and see the sector break down and what the top performing sectors are doing.

News

You may have heard the expression, “Buy on the rumor, and sell on the news.” Nothing could be more true. You will see that bad news can affect a stock dramatically. News is not critical enough for strong stocks especially if you are in it for the long run. However, some news might be relevant to your stock enough for you to consider it. Just ask people who invested in Enron see chart.

Investor Business Daily (IBD)

No this not an acronym for a disease and it stands for Investor Business Daily. I have to say I love this paper. It offers some what of a short cut to fundamental analysis not completely but pretty close. It has a very advanced rating system that ranks stocks based on certain fundamental criteria. When I began using IBD I opened a paper trade account and wanted to test their picks. And here are the Results in the last month.

The Investor Business Daily is a little expensive to purchase but you can sign up for a free 2 week trial and you can at least see what it looks like. If you are a serious investor it would be wise decision to get subscription.

When picking a stock to follow use the fundamental tools here. Remember

Volume +500,000
EPS +25% over 3years
ROE (Return On Equity) +17% over 3 years
Accumulation +70%
Earnings +25%
Financial Statements: 10 year summary looking for increasing sales and income.

Next: Advanced Fundamental Analysis

Stock Market Basics
1. Understanding the Stock Market
2. Equities ( The Basics of Stocks)
3. The Fundamentals
4. Advance Fundamentals
5. Charting and Technical Analysis
6. Virtual Trading
7. Finding a Company You Like
8. Buying and Selling Stock
9. Trading Systems and How to Create One
10. Market Cycles
11. Sectors