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How to Analyze Stocks - Fundamental
Analysis
“When you buy a share of stock you are buying a proportional share in a business”. To buy the right stock, we need to determine how much the business is worth. There are several approaches to do that:
1. Company Size - different-size companies have shown different returns over time, with the returns being higher the smaller the company. We can divide the company size into 3 parts:
• SMALL - $500 million or less
• MID - $500 million to $5 billion
• LARGE - $5 billion or more
Most people traded stock in companies that are in the small category.
2. Value - In order to buy good stock you need to know the price and the value of a company's stock. The goal of the value investor is to purchase companies at a large discount to their intrinsic value - what the business would be worth if it were sold tomorrow. Those who describe themselves as value investors are focused on the liquidation value of a company, or what it might be worth if all of its assets were sold tomorrow.
Investors who use this method to determine the value of a company: Sir John Templeton, Michael Price, Benjamin Graham
3. Growth - Growth investors believe that you should buy stock in companies who have potential for growth in sales and earnings. Growth investors buy companies that they believe are capable of increasing sales and earnings. They look at the underlying quality of the business and the rate at which it is growing in order to analyze whether to buy it.
Investors who use this method to determine the value of a company: Phil Fisher, T. Rowe Price
4. Income - Income investors buy stock because of the stream of dividends they generate. They focus on companies that pay high dividends (like utilities and real estate investment trusts, REITs)
5. Momentum - Momentum investors believe that large increases in the price of a company will continue to provide additional gains. This strategy looks to capture gains by riding "hot" stocks and selling "cold" ones. Momentum investors buy stock which has risen significantly above the others and has outperformed all other stocks. Those kinds of companies often beat analyst estimates for earnings per share or revenues or have high quarterly and annual earnings and sales growth relative to all other companies.
6. Quality - A hybrid of value, growth, and GARP approaches. These investors are looking for high-quality businesses selling for cheap prices. They are looking at the company's valuation and at the inherent quality of the company and qualitatively by the competence of management.
Investors who use this method to determine the value of a company: Warren Buffett, Benjamin Graham, Charlie Munger
7. GARP - an acronym for “growth at a reasonable price.” GARP investors combine the value and growth approaches. Basically, they look for companies with solid growth prospects and current share prices that do not reflect the value of the business.
Investor who use this method to determine the value of a company: Peter Lynch
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