What are you hoping for?
Applying Fundamental Analysis to Equity Research: What are you hoping for?
We are now going to come up with a way to do a "limited resource" equity study. As individual investors, you and I can only use a few tools to do research on stocks. This is why I call it "limited resource". The internet, the annual report of the company, and MS Excel are these tools. This means that an institution can get access to human resources (analysts), business management, financial databases (like Bloomberg, Reuters, Factset, etc.), industry reports, and other things. The point of this article is to show how to learn more about a company and its business with the tools you have available. We will, of course, do this practice with the end goal in mind, which is to decide whether to buy a stock or not.
The process of researching stocks will be organized into three steps:
- Understanding the Business
- Application of the checklist
- Intrinsic Value estimation (Valuation) to understand the fair price of the stock
Once we choose a company to study, the first thing we do is learn as much as we can about it. A lot of times, people skip this important step and go straight to the stock price research. If you only care about the short term, looking at the stock price is fine. But if you want to make long-term investments, you need to know a lot about the business.
When things are going badly (called bear markets), the more you know about the company, the more likely you are to stick with your investment. Remember that prices change during bear markets, not the basics of the business. If you know a lot about the company and how it does business, you can convince yourself that it's still a good idea to hold on to the stock, even if the market thinks otherwise. People say that bear markets build value, so if you really believe in a company, you might want to buy into the stock during bear markets instead of selling it. Of course, this goes against everything you think, and it takes years of experience investing to fully understand this.
the website and yearly report of the company are the best places to find information about the business. We need to look at at least the last five years' worth of yearly reports to see how they change as the business goes through different stages.
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