Fundamental analysis is the practice of analyzing stocks to determine their intrinsic value. Unlike technical investing, value investing relies heavily on looking at the health of the company itself. It is a long term strategy that is rooted in the belief that companies that generate consistent free cash flow will continue to grow and as a result will have rising stock prices. The key to becoming a successful value investor is to research the company by assessing its debt levels, return on equity, cash left over after subtracting capital expenditures from operating activities, and the general health of its balance sheet, cash flow statement and income statement.
Value investing looks at a company's competitive advantage over its competitors, its product roadmap and sales projections, and the company's management structure and the leaders themselves. All of this information is then used to arrive at a value for the company itself and its stock. The intrinsic value of the stock may or may not be the same value as the price that the stock is currently trading at in the stock market. It is these variations between the observed share price and the calculated intrinsic value that lead to an investment decision. If the intrinsic value of the stock is lower than the current stock price then the company is thought to be overvalued and therefore not a good investment. If, however, the intrinsic value of the stock in higher than the current stock price then the stock is thought to be trading at a discount and would therefore be a good investment choice.
To be a value investor you must confirm that a company is fundamentally sound, that its financial reports are healthy and balanced, and that it has a competitive advantage over its competing firms. All of that analysis makes it necessary that you read annual reports for the firm you are examining as well as its competition for you to analyze risk and the company's long-term performance. Right after all that is finished and you've made the decision the actual company is surely a good one to invest in, it's necessary that you assess if the current share price is trading at a discount. In cases where the stock price is not trading at a discount, it makes no real sense to get the security at a higher price. That would remove the purpose of making an investment in the business due to the fact its potential future growth is priced into the stock price.
DCF models require that you asses the free cash flow for a company. The FCF comes from the calculation of the difference between capital expenses and total cash from operations that is derived from the statement of cash flows for the company. You can find such information on websites like Yahoo! Finance and Google finance.
There have been many studies that have shown that value investing works, but many investors are mezmorized by the promise of stocks that grow by 100% overnight. There is nothing more exciting that having your money double in no time at all, but the reality is that sound investing is often slow, consistent, and for lack of a better word, boring. It is those investors with discipline to stick to proven strategies over the long term that will be rewarded in the end.
Value investing looks at a company's competitive advantage over its competitors, its product roadmap and sales projections, and the company's management structure and the leaders themselves. All of this information is then used to arrive at a value for the company itself and its stock. The intrinsic value of the stock may or may not be the same value as the price that the stock is currently trading at in the stock market. It is these variations between the observed share price and the calculated intrinsic value that lead to an investment decision. If the intrinsic value of the stock is lower than the current stock price then the company is thought to be overvalued and therefore not a good investment. If, however, the intrinsic value of the stock in higher than the current stock price then the stock is thought to be trading at a discount and would therefore be a good investment choice.
To be a value investor you must confirm that a company is fundamentally sound, that its financial reports are healthy and balanced, and that it has a competitive advantage over its competing firms. All of that analysis makes it necessary that you read annual reports for the firm you are examining as well as its competition for you to analyze risk and the company's long-term performance. Right after all that is finished and you've made the decision the actual company is surely a good one to invest in, it's necessary that you assess if the current share price is trading at a discount. In cases where the stock price is not trading at a discount, it makes no real sense to get the security at a higher price. That would remove the purpose of making an investment in the business due to the fact its potential future growth is priced into the stock price.
DCF models require that you asses the free cash flow for a company. The FCF comes from the calculation of the difference between capital expenses and total cash from operations that is derived from the statement of cash flows for the company. You can find such information on websites like Yahoo! Finance and Google finance.
There have been many studies that have shown that value investing works, but many investors are mezmorized by the promise of stocks that grow by 100% overnight. There is nothing more exciting that having your money double in no time at all, but the reality is that sound investing is often slow, consistent, and for lack of a better word, boring. It is those investors with discipline to stick to proven strategies over the long term that will be rewarded in the end.
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To learn more about being a value investor visit the Value Investor Headquarters website.
