Introduction to Fundamental Analysis

Fundamental analysis is how serious investors evaluate whether a stock is worth buying. Instead of guessing where prices might go, you're asking: "What is this company actually worth?" [DEFINITION] Fundamental Analysis: A method of evaluating a security by analyzing the financial and economic factors that influence its intrinsic value. [DEFINITION] Intrinsic Value: The "true" worth of a company based on its underlying business fundamentals, independent of its current market price. ### The Core Question Every fundamental analysis asks: [KEY] Is the stock's current price higher or lower than the company's intrinsic value? - Price < Value = Undervalued (potential buy) - Price = Value = Fairly valued (hold) - Price > Value = Overvalued (avoid or sell) ### Fundamental vs. Technical Analysis | Fundamental Analysis | Technical Analysis | |---------------------|-------------------| | Studies business value | Studies price patterns | | Uses financial statements | Uses charts and indicators | | Long-term focus | Short to medium-term focus | | Asks "what is it worth?" | Asks "where is price going?" | [TIP] The best investors often use both approaches. Fundamental analysis identifies WHAT to buy, technical analysis can help with WHEN to buy. ### What Fundamentalists Study **Financial Statements:** - Income statement (profits) - Balance sheet (assets vs. liabilities) - Cash flow statement (money movement) **Business Quality:** - Competitive advantages (moats) - Management quality - Industry dynamics - Growth potential **Valuation:** - Price-to-earnings ratio - Price-to-book ratio - Discounted cash flow models [EXAMPLE] You're analyzing Apple. You study: - Revenue growth (are sales increasing?) - Profit margins (how much do they keep?) - iPhone market share (competitive position?) - Services growth (new revenue streams?) - Balance sheet (are they financially strong?) - Management (does leadership execute well?) Only after understanding ALL this do you consider the stock price. ### Where to Find Information **Primary Sources:** - SEC filings (10-K, 10-Q, 8-K) at sec.gov/edgar - Earnings call transcripts - Investor presentations - Company annual reports **Secondary Sources:** - Financial news (Bloomberg, CNBC, WSJ) - Analyst reports (available through brokers) - Stock screeners (Finviz, Yahoo Finance) - Research platforms (Morningstar, Seeking Alpha) [KEY] Warren Buffett, arguably history's greatest investor, relies almost exclusively on fundamental analysis. He said: "In the short run, the market is a voting machine. In the long run, it's a weighing machine." ### The Patience Factor [WARNING] Fundamental analysis requires patience. The market can misprice stocks for months or even years. You must be willing to wait for value to be recognized. [EXAMPLE] In 2016, many fundamentalists identified Microsoft as undervalued at $50. The company's cloud business (Azure) was growing rapidly, but the market was slow to recognize it. Those who bought based on fundamentals saw the stock rise to $400+ over the next 8 years—a 700%+ return. [EXERCISE] You find a stock trading at $50 per share. Your fundamental analysis suggests it's worth $75 (50% undervalued). Should you immediately buy as much as possible? |ANSWER| Not necessarily. Consider: 1) How confident are you in your analysis? 2) What's your timeline? 3) Could it get MORE undervalued first? 4) Is your analysis better than Wall Street's? Size your position appropriately for your conviction level. [SCENARIO] A stock you analyzed as worth $100 trades at $80. You buy. The market crashes, and it falls to $60. Do you: A) Sell to cut losses, or B) Buy more because it's even more undervalued? If your fundamental thesis hasn't changed, this is actually a gift—you can buy more of something you believe is worth $100. This is the mental framework of fundamental investing.