How To Analyze Stocks (Fundamental Analysis)

Summary

This video discusses the two main types of stock analysis: fundamental and technical analysis. The focus is on fundamental analysis, which is divided into qualitative and quantitative methods. Qualitative analysis involves insights that can't be quantified, such as disruption or economic moats, while quantitative analysis relies on measurable data like earnings, assets, and ratios. The video also covers the importance of key financial metrics, particularly earnings and net income, in determining a company's potential. It emphasizes how understanding these aspects can help traders make informed investment decisions.

Takeaways

• 😀 Fundamental analysis helps investors determine *what* to buy, while technical analysis focuses on *when* to buy.
• 😀 Fundamental analysis is divided into two categories: qualitative and quantitative.
• 😀 Qualitative analysis deals with factors that can't be quantified, such as disruptions in the market, economic moat, and management quality.
• 😀 Quantitative analysis deals with factors that can be measured, such as assets, liabilities, revenue, earnings, and ratios like P/E and P/B.
• 😀 Fundamental analysis aims to derive the intrinsic value of a company to make buying and selling decisions based on the stock's price relative to that value.
• 😀 The advantage of qualitative analysis is that it can provide insights into future disruptions or advantages that others might overlook, but it's difficult to quantify and can lead to analysis paralysis.
• 😀 The strength of quantitative analysis lies in its ability to provide measurable data for backtesting and identifying patterns, but it can also overwhelm with too much information.
• 😀 Earnings and net income are key metrics for stock traders because they can reflect the health and growth potential of a company.
• 😀 For stock traders, improving earnings and net income over time signal that the company's fundamentals are strong, even in cases of management turnaround or innovation.
• 😀 In the context of earnings, both quarter-on-quarter and year-on-year improvements are important for identifying potential growth in a company's financials.
• 😀 Both qualitative and quantitative analyses have their pros and cons, but combining them can offer a more comprehensive view of a company's potential for investment.

Q & A

What is the difference between fundamental analysis and technical analysis?

Fundamental analysis helps you determine *what* to buy by assessing a company's intrinsic value, while technical analysis focuses on stock price trends and tells you *when* to buy.

What is the main goal of fundamental analysis?

The main goal of fundamental analysis is to determine the intrinsic value of a company, and then make investment decisions based on whether the stock price is below (buy) or above (sell) that intrinsic value.

What are the two main categories of fundamental analysis?

The two main categories of fundamental analysis are qualitative analysis (non-quantifiable factors like disruption or company management) and quantitative analysis (measurable factors like revenue and earnings).

Can you provide an example of qualitative fundamental analysis?

An example of qualitative analysis would be identifying a disruptive new technology, like a material replacing oil, which could negatively impact an oil company's business and stock price.

What is meant by an 'economic moat' in qualitative analysis?

An 'economic moat' refers to a company's competitive advantage, such as strong branding or market dominance, which makes it difficult for competitors to challenge the company. For example, Coca-Cola's brand is a strong economic moat.

How does quantitative analysis differ from qualitative analysis?

Quantitative analysis focuses on measurable data, such as earnings, revenue, and financial ratios, while qualitative analysis looks at non-quantifiable factors like company leadership and market trends.

What are some examples of metrics used in quantitative analysis?

Some common metrics in quantitative analysis include the P/E ratio (price-to-earnings ratio), P/B ratio (price-to-book ratio), and P/CF ratio (price-to-cash-flow ratio). These help assess a company's financial health and stock value.

What is the advantage of quantitative analysis over qualitative analysis?

Quantitative analysis allows for data-backed decisions that can be backtested to identify patterns and trends, helping investors make informed choices based on measurable factors.

What are the pros and cons of qualitative analysis?

The pros of qualitative analysis include gaining unique insights that other investors may miss, while the cons include information overload and difficulty in determining which data is relevant in a given market situation.

Why do stock traders focus on earnings and net income?

Stock traders focus on earnings and net income because they are clear indicators of a company's financial health. Improving earnings and net income suggest a company is on the right track, which could indicate future stock price growth.