Recently, I have attended a seminar about Fundamental Analysis. At first, I wasn’t at all interested but it was free, so I took a chance (I’m a technician and might always be –I only use charts when trading). Not that I don’t have any idea about it, but it was the first time I heard thoughts from the industry experts. My background is on finance, so I thought I know it all. But hey, I was reminded of the basics in life, from the decisions I make every day to choosing the right stocks. As I was listening to the speaker, I can’t help but to associate Fundamentals of how I choose Mr. Right. Sounds lame? Let’s try.
The speaker tried his best to explain what Fundamental Analysis is. After all the brouhaha and occasional excerpts from Warren Buffet, it was explained “it all boils down to intrinsic value of a company” and that it uses basic tools such as Price to Earnings (P/E), Earnings Per Share (EPS), as well as macro/micro economic and industry specific factors, yada yada. Then the disclaimer: It promises nothing but a GUIDE. My thoughts, “It makes sense”.
Why Use Fundamental Analysis?
This lesson got me thinking. It seems to me that there are certain fundamentals not only in the Stock market but also in choosing Mr. Right/boyfriend, that we should have under control before we make decisions. I was eying for the speaker as an example, he looked good (fair complexion and expressive eyes) and conventional wisdom often tells us that appearance is the sole parameter of our choices without considering their intrinsic value. Isn’t it always better to look at HIM on a macro level? Question is, “ How do I know if he is the right one for me”. If that’s the case, then I should find time to research other factors. For one, I have to consider his moral beliefs by the way he speaks and interacts with other people (in this case, the listeners). His career (can be used to interpret his Financial Statements) can say so much. I also need to know about his family, Am I compatible with my soon to be in-laws? I would have to study his friends, “will they lead him to the right directions?”. And among other things like his Facebook and Twitter account which will give me an idea about his values. But again, a disclaimer, this will not precisely predict my happy ending relationship. As to my analysis with the speaker, he fared well.
Fundamental Analysis (The Speaker): Wedding ring-None (single); Long Sleeve shirt matched with blue jeans- with ragged fashion sense (far from gayish); Constant fiddling of nose while discussing means he is thinking/ smart person (or at times yucky); Taglish medium- came from a premier school (can be DLSU, UST, Ateneo or San Beda) which means he can be bankable (or maybe he can’t speak good English); Expensive watch- which means he can and might be bankable; Smile: amiable; Some Cheesy jokes- he can make me laugh; Broker: a potential insider tip (hehe). Recommendation: Buy
In the world of Stock market, Fundamental Analysis is all about getting to know the company, the health of the business and its potentials. It includes reading financial reports (B/S and P&L), leverages, competitors and market environment.
What to look for?
- Before we invest in a company, we need to know if the company is making profits. A simplified view of the earnings is Earnings Per Share (EPS). It denotes the amount of earnings for each outstanding share. EPS= Earnings/Outstanding Shares.
- Price-to-Earnings (P/E). This is the current price divided by its earnings per share (EPS). Most says, this is the easiest way to get a quick look of a stock’s value. If P/E is high, the price therefore seems to be expensive since it indicates that the stock is priced relatively high to its earnings. But this needs to be compared to the industry where the company belongs to.
- Price-to-Book (P/B). A price-to-book (P/B) ratio is used to compare a stock’s market value to its book value. It can be calculated as the current share price divided to the book value per share, according to previous financial statement. This ratio gives certain idea of whether you are paying too high price for the stock as it denotes what would be the residual value if the company went bankrupt today. This is more accurate to use in the Banking/Financial Industry.
- Other Macro and Micro factors surrounding the industry and company.
From a Fundamentalist perspective (which I am not a fan aside from using it to choose Mr. Right), when determining whether a company’s stock is a great investment, Fundamental Analysis is a great means to reach a conclusion. Not perfect, but a good guide. It will always be up to us.
When it comes to choosing Mr .Right, the one who can be sure if you are choosing is you. We all come up with the idea of the right man and how we want our lives in the future, so we can use the fundamentals as a guide.
This is not in any way an advertisement to a broker, but if you are interested to learn about stock investing for free, you may contact:
Philstocks/ Accord Capital Equities Corp.
G/F Unit EC-05B East Tower
Philippine Stock Exchange Center
Exchange Road, Ortigas Center
Phone: +63 (2) 588 1900
Watch out for my Technical Analysis post 🙂