Fundamental analysis is the practice of analyzing stocks to determine their intrinsic value. Unlike technical investing, value investing relies heavily on looking at the health of the company itself. It is a long term strategy that is rooted in the belief that companies that generate consistent free cash flow will continue to grow and as a result will have rising stock prices. The key to becoming a successful value investor is to research the company by assessing its debt levels, return on equity, cash left over after subtracting capital expenditures from operating activities, and the general health of its balance sheet, cash flow statement and income statement.
Value investing looks at a company's competitive advantage over its competitors, its product roadmap and sales projections, and the company's management structure and the leaders themselves. All of this information is then used to arrive at a value for the company itself and its stock. The intrinsic value of the stock may or may not be the same value as the price that the stock is currently trading at in the stock market. It is these variations between the observed share price and the calculated intrinsic value that lead to an investment decision. If the intrinsic value of the stock is lower than the current stock price then the company is thought to be overvalued and therefore not a good investment. If, however, the intrinsic value of the stock in higher than the current stock price then the stock is thought to be trading at a discount and would therefore be a good investment choice.
One of the keys to become a highly effective value investor will be to first screen out firms that won't be a good match and tend to be not outstanding value investing securities. This may include getting rid of businesses with no earnings, extremely high debt-to-equity ratios, micro-cap stocks, companies where return-on-equity is lower than 10%, and firms without having dependable positive free cash flow.
DCF models require that you asses the free cash flow for a company. The FCF comes from the calculation of the difference between capital expenses and total cash from operations that is derived from the statement of cash flows for the company. You can find such information on websites like Yahoo! Finance and Google finance.
There are countless studies that have shown that value investing works, but lots of investors chase the illusion that companies can grow by 500% in no time. There is no greater joy than when a stock grows really fast, but the reality is that slow growth is the name of the game.
Value investing looks at a company's competitive advantage over its competitors, its product roadmap and sales projections, and the company's management structure and the leaders themselves. All of this information is then used to arrive at a value for the company itself and its stock. The intrinsic value of the stock may or may not be the same value as the price that the stock is currently trading at in the stock market. It is these variations between the observed share price and the calculated intrinsic value that lead to an investment decision. If the intrinsic value of the stock is lower than the current stock price then the company is thought to be overvalued and therefore not a good investment. If, however, the intrinsic value of the stock in higher than the current stock price then the stock is thought to be trading at a discount and would therefore be a good investment choice.
One of the keys to become a highly effective value investor will be to first screen out firms that won't be a good match and tend to be not outstanding value investing securities. This may include getting rid of businesses with no earnings, extremely high debt-to-equity ratios, micro-cap stocks, companies where return-on-equity is lower than 10%, and firms without having dependable positive free cash flow.
DCF models require that you asses the free cash flow for a company. The FCF comes from the calculation of the difference between capital expenses and total cash from operations that is derived from the statement of cash flows for the company. You can find such information on websites like Yahoo! Finance and Google finance.
There are countless studies that have shown that value investing works, but lots of investors chase the illusion that companies can grow by 500% in no time. There is no greater joy than when a stock grows really fast, but the reality is that slow growth is the name of the game.
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To get more information about becoming a value investor please go to the Value Investor Headquarters website.
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