🚨 SPOILER ALERT 🚨 w/ Fundamental Analysis
When a friend tells you they invested in some meme stonk, how would you figure out if you should, too?
IRL analysts are paid to deliver buy- and sell-ratings on particular companies, taking in all the available data and metrics to calculate the estimated value of a particular company’s stock. But how do they do that? This process, AKA fundamental analysis, determines a particular asset’s real, or ‘intrinsic’ value. It takes into consideration all the relevant factors to calculate whether or not a company is properly valued within the broader market.
With a little research, you can start to determine a company's value and whether or not you would like to invest in it. Here, we will cover the very basics to ensure that you understand the fundamentals of *drum roll* fundamental analysis!
TL;DR: It may be easier to follow the advice of your friends, YouTubers, or even your own financial advisor, but investing starts with understanding what drives a stock to sh*t hot, how-is-this-even-possible performance. That takes, maybe annoyingly so, doing your own damn due diligence and partaking in fundamental analysis.
Fundamental analysis isn’t about just the company. It’s a holistic, top-down approach: from the economy at large, to the strength or opportunity of a particular market sector, to concentrating on individual company performance and characteristics. To be frank, it is rigorous, ongoing, and expansive - and fundamentals can change seemingly overnight. Due to the breadth of factors you have to take into account, it’s really difficult to define how exactly the fundamentals of a given stock should be priced - this is why Wall Street pays big bucks to analysts to do it for a living, why boomers love ETFs, and why people tend to just give their money to financial advisors.
But don’t be discouraged! You don't have to rock the midtown uniform to invest like it. To help define what is important when evaluating a company and its place in the great big world of the stonks market, you can think of fundamental analysis in two classes of elements: quantitative, and qualitative.
Quantitative Elements:
The quantitative elements are the hard, ‘show me the money’ data points. Information that is measurable, and can be shown in numbers. These are the measurables that investors look for in earnings statements - revenue, profit, assets, debt, and growth can all be defined, and are shared in these statements, and can be measured with precision.
For the greater economy, qualitative elements that affect stock prices include interest rates, inflation (or deflation), GDP, unemployment, and general stability (trade wars, terrorist attacks, insurrections at the Capitol). This is your BFD news that moves the entire market. While it's 100% true that the stock market is not the economy, the economy and the market converge and diverge from each other - this loose affiliation normally becomes tighter with events that affect our economy at large.
Industry-specific qualitative elements are similar, but different - while their benefit or detriment tends to take hold of an industry and all of its stakeholders, it normally does not have a market-moving consequence. Policy, taxes, consumer data, and sector health can help to determine whether or not an industry is primed for years of unprecedented growth, or if it's oil.
Finally, stock-specific factors are all about the company: earnings statements, EPS and earnings ratios, dividend payouts, and debt. Without the context of the industry and general market, these quantitative elements are given more context, and you can begin to get an idea of what you are working with in terms of investment.
Qualitative Elements:
Qualitative elements of fundamental analysis is data is the more nuanced, less numerically inclined characteristics of a company. They are the less tangible and immeasurable factors of a company’s performance, or projected performance over time - and they are equally, if not more important to your quantitative research. This gives the hard numbers definition. It's why companies can have a dumpster fire of a balance sheet and still become the hottest thing since sliced bread, or your bff talking about that hot date that checked all their boxes, but where was the romance??
For the greater economy, these can be softer trends such as market sentiment, socioeconomic trends, and general quality of life. And for industry, mergers and acquisitions, layoffs/bankruptcy, and other news can tell investors a lot about how a company, even if unrelated to the news, is faring in the seas of capitalism, especially when paired with competitive analysis. And for the stock individually? The company's brand recognition, executive management, patents, proprietary technologies, company culture and core values, legal proceedings - heck, even Elon Musk tweeting about it.
Okay, your head might be spinning. You might be thinking, 'do I really have to do this for every stock I want to invest in?' No, you don’t have to - but it's a good idea, isn't it?
Bottom Line
Yes - fundamental analysis is time-consuming. But the work that you put in upfront pays off, both in impressive portfolio gains and in peace of mind if stuff goes south. Using both quantitative and qualitative data, you can start making your own investment decisions and do so with confidence.
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