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Fundamental Analysis: How To Pick Stocks For The Long Term

May 1 by Jitan Solanki

If you’re reading this, you most likely have the stock picking bug! You may even be dreaming of how you can build a solid stock portfolio that will make you the top dog on the block. Or, if you’re single, probably something completely different. Nonetheless, wherever you are in your journey, learning about fundamental analysis to pick stocks for the long term is absolutely key.

You’re probably thinking: “Why do I need fundamental analysis? I just follow my gut instinct.”

It’s a good question. Here’s the answer: You have the chance – in fact, the opportunity – to operate on a level playing field with billionaire stock seers pickers like Warren Buffet, George Soros and Carl Icahn. Without fundamental analysis, it’s like turning up to a fist fight with no arms.

But don’t you worry. Below is a breakdown of the best fundamentals to use to pick the best stocks for the long term. Now you can show up at the fist fight with a bazooka!

It’s time for the big guns!


The Fundamental Trader’s Arsenal

In order to start using fundamental analysis you need to assemble the right types of information. There is a lot of junk out there on the web but there are also a few gems that can make a difference. It’s also not all about the numbers. Market positioning, for instance, is very useful. Let’s have a look at the top three you should have at your disposal in your arsenal.


#1 The Company’s Financial Statements

Financial statements are hugely important when analysing the fundamentals of a company. It’s what an engine is to a mechanic – the main place to determine its overall health. Financial statements are typically broken up into three different areas:

i. The Income Statement: This basically subtracts the expenses of the company from its revenues, leaving the income or profit left over. These figures are super important. After all, if a company’s income isn’t increasing over time – then something is wrong. Imagine if you had a job where they kept paying you less over time? Most likely, you’ll be thinking of packing up your bags and moving on. There’s no difference.

ii. The Balance Sheet: This sheet is used to show the company’s assets, liabilities and shareholder’s equity. A company’s assets basically shows anything the company owns that has some real financial value. The liabilities and shareholder’s equity show the ways those things were paid for. After all, shareholders invest in the company, so the company can then invest their money to grow the overall business and make everyone a profit. Liabilities could include items like bank loans. A company with low debt and lots of assets is favoured amongst many fund managers like Warren Buffett and other top dogs.

iii. The Statement of Cash Flow: This statement breaks down all the money that was taken in by a company and how it has been distributed across the business. It’s typically broken down into operating, financing and investing costs. It’s a useful tool to make sure all the income received is being spent wisely and not just on bumping up executive pay, which shareholders don’t like (unless there are some huge profits in it for themselves, of course!).

fundamental analysis

Aha, now it all makes sense!


#2 The Company’s Competition & Business Model

Sometimes it’s not how big your numbers are but what you do with your assets that make the difference. When picking stocks, identifying the company’s business model as well as current (and future) competition is essential.

For example, imagine a company reinvests all its revenue and profits into research, development and growth. Most likely, it’ll be paying a low dividend but will show stronger growth prospects. Remember that dividends are a form of income an investor gets for investing into a company. (Read more about dividends.)

However, if a company is paying out all its profits to shareholders, it will have a high dividend. This attracts larger, more conservative mutual funds. This means that growth in the stock price will be quite stable as it is most likely a mature company that has already reached its peak.

Of course, it all depends on what you are trying to achieve in your portfolio. Are you looking for steady stocks that pay out healthy and consistent dividends? Or, are you looking for that next big tech stock that will go from $15 to $100 per share in just a few years? Whatever you’re looking for, fundamental analysis is the key!

fundamental analysis

Who’s your money on?


#3 The Company’s Management Report

In every public company’s annual report, management has to provide a synopsis on how it’s been performing. This is an opportunity for investors to analyse why the company has, or hasn’t, been performing well. It can also detail their plans for the future, allowing you to decide whether they’re any good or not. This is the golden ticket in fundamental analysis. Seeing progress – or lack thereof – in the company’s plans gives an investor a sense of which direction the company is heading in.


Putting Your Fundamental Analysis Into Action

Now you know the top three factors that fundamental traders use to pick stocks for the long term. How you use each factor depends on what kind of stocks you are looking for: the ones that pay steady dividends with not much stock price growth; or the ones that pay low or zero dividends, but could experience very high stock price growth.

Equipped with these fundamental analysis skills, you can now feel more confident in your own judgment. And if you’re still unsure, then look to the best to see how they invest and find out the way Warren Buffet picks stocks.

Written by

Jitan Solanki

A self-certified trading junkie, he's not your typical heavy metal drummer and international traveller. But he loves to share his ideas and passion to all, no matter where he is in the world. He has a lot to share with over ten years experience trading stocks, commodities and foreign exchange. Connect with him on BUX: jitans

Disclaimer: All views, opinions or analysis expressed in articles are that of the author and do not represent the views of BUX. Neither BUX nor the author provide financial advice and these articles should not be construed as such.

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