Fundamental analysis is closer to an art than to a science. Fundamental analysts use a variety of formulas and quantitative measures to select their companies. All of these are imperfect and no formula-driven selection method works well all of the time. While we will use the tools of the trade to help our analysis, we recognize that logic, sound judgment, and common sense are more valuable than formulas and models.
Our primary comparison is between the quality of the company and the premium that it sells for in the marketplace. In particular, we either want invest in good companies that are selling at low premiums or to invest in excellent companies that selling at medium-range premiums.
Our chosen style for this particular project is a value-tilt approach - identifying companies selling at less their intrinsic value but with an eye toward future growth as well. Our ideal investment is a well-managed, fundamentally sound company that has a proven demand for its products and services - but one that is selling at a discount to its intrinsic value (i.e., fair price). We are willing to invest in companies which have experienced some problems (with an accompanying decline in price) but only if those problems have been solved or will be solved sometime within the next twelve months.
We will use the available screening software to identify financially sound companies with low to medium-range P/E ratios and attractive growth prospects. After having narrowed down the list of stocks, we will investigate the surviving stocks in depth.
|Downside risk: We want to minimize our downside risk by ensuring that the companies in which we invest are financially sound, well managed, and enjoy a strong demand for their products and services. We will do this by making sure that we:|
- read and study enough to thoroughly understand the business and its industry,
- analyze the companies' financial strengths and weaknesses (through a ratio analysis),
- analyze the competitive pressures within the industry, with an eye toward the future sales growth,
- avoid stocks selling at extremely high premiums (i.e., price/earnings ratios).
|Upside potential: We want to ensure that our selected stocks possess considerable upside potential by:|
- analyzing the potential growth of the companies sales,
- selecting firms with a relatively high (and sustainable) operating profit margin and return on equity,
- favoring firms which offer the promise of an appreciation in the stocks P/E ratio.
|Valuation: We will ensure that we do not overpay for a companys potential by:|
- determining the fair price of the company through use of a dividend discount model.
- using a variety of valuation measures to gain a broader perspective of the stock's true value.
Our 10 Tenets
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