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Fundamental Stock Analysis
Fundamental stock analysis begins with the techniques and stock analysis tools used with the strategy appropriately termed "Fundamental Analysis". This is the fundamental stock analysis strategy used by most Wall Street analysts. The objective of this stock exchange analysis strategy is to use Fundamental Analysis to find growing companies, and utilize a buy and hold strategy while they increase in price. Once the stock's earnings growth slows (for the long term) to say less than 15 percent per year, we would then sell the stock. The key is to use these fundamental stock analysis tools to find a company with good management in a growing industry. The main indicator used for this is the Earnings per Share ratio (net income divided by the number of common shares of stock outstanding).
You will want to find companies that post a consistent increase in earnings of 15 percent or more in annual growth. You must also realize that the larger a company gets the harder it becomes for it to maintain a 15 or 20 percent growth every year. Especially during slower economic periods so be prepared to spent a little time researching on a consistent schedule. Once you have initially structured your portfolio this can be accomplished with maybe spending an hour every Saturday.
Another financial ratio to follow is the P/E ratio (The ratio of the price per share of a stock to its annual Earnings per Share). You should be monitoring companies with high growth for possible short term opportunities, especially companies that Wall Street follows closely. When earnings slow or drop for a reported quarter the stock will begin to be sold causing a rapid drop in the price per share. But many times this will only be temporary and the stock price will also rapidly return to the normal or average price therefore presenting an opportunity to prosper on a short term basis. Usually these larger companies will maintain P/E ratios around 15 to 20 but during these temporary drops in price the P/E ration will fall to around 10. Therefore the strategy is as follows:
* If you already own the stock you will want to sell it as soon as it starts to fall or is announced that the growth has slowed or dropped. A possible way to accomplish this is to place stop orders on the date quarterly earnings are posted if you cannot actually monitor the stock yourself.
* If you do not already own the stock wait until the stock's P/E ratio drops and levels off, (usually around 10), then purchase the stock and wait for it to rebound in price.
One thing you must realize and research if you are going to utilize this strategy is why did the earnings growth change? Pinpoint the cause of the earnings growth change to evaluate if this will be a temporary drop or not. For instance the retailer Wal Mart will post its quarterly earnings around the end of February now due to sales from Christmas these earnings should be higher then the previous quarter therefore the temporary reaction will be to buy the stock causing a temporary increase in the price of the stock, then the price will return to it average range over the next two or three weeks. This year, February 21, 2006 they reported their 4th quarterly earnings and sales then over the next 3 weeks into March the stock increased in price almost .00 a share and over the following 2 - 3 weeks after it dropped almost as much to its original starting point.
This is just one of many financial ratios that are used in Fundamental Analysis for the valuation process of prospective entities. You should realize that there is several financial ratios used in the over process of Fundamental Analysis and that no matter what happened in the past we can not always predict the future. Therefore you should make sure you utilize a range of the fundamental stock analysis tools not just limiting yourself to this one.
To learn more about fundamental analysis go to: http://www.OnlineInvestmentGuide.com
© 2006 Strategic Resolutions, LLC All Rights Reserved
About the Author: Scott G. Henderson holds degrees of Bachelor of Science degree in Electronic Engineering and Master of Business Administration. He has written many articles about the subject of financial portfolio management and after years of personal experience, education and research he spent over 18 months writing and developing the educational curriculum
"Successful Online Portfolio Management"
If you found this article to be informative and would like to know more about the fundamentals and strategies of portfolio management you can visit his web site at: http://www.OnlineInvestmentGuide.com