Fundamentals tell you what and how, Technicals tell you when and how much.
- Jurrien Timmer
What is Fundamental Analysis
Fundamental analysis focuses on analyzing a company's health and fitness through qualitative and quantitative measures.Health & Fitness Factors
- Is the business model sustainable?
- Is there a competitive edge that can be maintained?
- Is management committed to making the right decision?
Does corporate governance structure protect shareholders?
- Is revenue steadily increasing?
- Are they able to retain earnings?
- Are they managing debt?
- Are they guiding higher over time?
Fundamental Analysis is broken into qualitative and quantitative information.
Qualitative information is related to the nature of the business.
business model
- competitive edge
- management team
- corporate governance
revenue
- earnings
- debt
- guidance
Qualitative Analysis
The nature of the business is derived from the business model, the competitive advantage, and corporate governance.
The business model reveals what the company does and its plan to turn a profit. A competitive advantage can be a product, service, or intangible characteristic that keeps the company superior to its competitors. Corporate governance reveals the system of policies, relationships, and responsibilities between management, directors, and shareholders.
Quantitative Analysis
Measurable characteristics are found in the financial statements.
The income statement reveals the financial performance over a period of time. The balance reveals the financial stability of a company through its assets and liabilities. The cash flow statement records the inflows and outflows of cash.
The weakness of Fundamental Analysis
Although fundamentals help to identify top-tier companies, they fail to spot optimal buying points. Optimal buying points are analyzed through price trends, support & resistance, market direction, and the business cycle, all characteristics provided through technical analysis and macroeconomics. Think like a proStock fundamentals could be great, but financial conditions are tightening, the overall market is beginning to trend lower, and technical indicators point lower. In this case, you may want to wait for more favorable conditions before starting a position. Technical analysis and macroeconomics help to size your position, and plan to add to your position relative to other technical indicators. The worst-case scenario is finding a great stock and going all-in at the top of a market cycle. Technical analysis and macroeconomics cover investing gaps unseen by fundamental analysis. Therefore, investors should be aware of technical analysis, fundamental analysis, and macroeconomics.