Fundamental analysis is the more traditional branch
of stock analysis: the evaluation of the company's business and
financials. To gauge how well a company will perform in the future,
analysts look at the company's balance sheet, organization, management,
and business strategies to see how well the company is positioned
and whether it manages its day-to-day operations well.
They review
annual
and quarterly reports, attend shareholder meetings, and talk to
employees, management, and industry experts. They ask about assets
and debts, how much money the company brings in, how much it spends,
and whether earnings are expected to rise or fall. Analysts pay
extra attention to developments that could affect the company's
expenses and earnings: for example,
mergers
and
acquisitions,
new products, expansion, or the launch of advertising campaigns.
Looking outside
Some factors that affect a company and its stock
are outside its control. The actions of competitors, legislators,
and customers play a big part in a company's fortunes. General
economic trends may push a company's stock price up or down. And
changes in related industries may affect the company as well.
For example, if the price of gasoline rises, an analyst may ask
how that added expense could affect delivery companies that rely
on ground transportation.
Sam Stovall,
Chief Investment Strategist at Standard & Poor’s
Learn why Sam Stovall of
S&P thinks that sector analysis is an important part of a stock research strategy.
Sector
analysis is critical. Academic studies have shown that from 60% to 80%
of a stock's price change is the result of the direction of the
overall market, and whether the sector of the stock is in or out of favor.
Hence the phrase "A rising tide lifts all boats." Only the
remaining 20% of a stock's move appears to be company specific.
So even though many "smart" investors claim that the "herd"
is frequently wrong, it can be very risky to buck the trend.
They review
Sam Stovall, 