Fundamental vs. Technical Analysis
Fundamental analysis looks at a company’s financial health—revenues, profits, debt, and industry outlook. Investors use this to estimate intrinsic value and determine if a stock is under- or over-valued.
Technical analysis examines price charts and trading volume to predict future movements. It uses patterns, trends, and indicators like RSI, MACD, and moving averages.
Many investors combine both approaches for a well-rounded view of the market.
Reading Financial Statements
Understanding financial statements is essential for evaluating a company’s performance:
- Income statement: Shows revenues, expenses, and net profit over time.
- Balance sheet: Lists assets, liabilities, and shareholder equity.
- Cash flow statement: Tracks how money flows in and out of the business.
Key metrics like revenue growth, debt-to-equity ratio, and profit margins can help you assess a company’s stability and growth potential.
Key metrics to know
Familiarity with valuation and performance metrics helps compare stocks:
- P/E ratio (Price/Earnings): Measures valuation relative to earnings.
- Dividend yield: Income received for each dollar invested.
- Return on Equity (ROE): Profitability compared to shareholder equity.
- EPS (Earnings per Share): Net income divided by outstanding shares.
These indicators offer quick insights into value, performance, and growth potential.
Chart basics and trends
Price charts visually represent a stock’s trading history. Key elements:
- Candlesticks: Show open, high, low, and close prices.
- Support/Resistance: Price levels that repeatedly stop declines or advances.
- Moving Averages: Smooth out price action to identify trends.
Patterns like head-and-shoulders or double bottoms can signal potential reversals or continuations.
News, sentiment, and macro factors
Stock prices react quickly to news and macro events:
- Earnings reports can move shares up or down based on expectations.
- Interest and inflation rate changes influence investment returns across asset classes. Higher interest and inflation rates are generally bad for the market.
- Global headlines, like wars or pandemics, can cause market volatility.
- Investor sentiment, often measured by indicators like the VIX, reflects fear or greed.
Staying informed helps you anticipate market movements and protect your investments.
Additional focus: characteristics of quality stocks
At our firm, we look for:
- Compelling stories: Businesses with clear missions, innovative products, or market leadership.
- High-quality management teams: Proven, ethical, and visionary leadership.
- High earnings growth: Consistent year-over-year earnings growth.
- Decent ROE and ROA: Above-average returns on equity and assets signal efficient use of capital.
- Above-average free cash flow: Indicates strong financial health and the ability to fund growth or return value to shareholders.
- Consistent dividend growth: Shows financial strength and shareholder commitment.
- Low leverage: Healthy debt levels reduce risk and improve stability.
- Low volatility: Stable price performance attracts conservative investors and long-term holders.