As I mentioned in my previous post entitled, “3rd Tip on Becoming a Financial Whiz: How to Value a Stock - Comparable Ratio Valuation”, once you have found an attractively priced stock, you must then analyze the company on a more detailed basis. This ensures that the stock you identified is indeed undervalued and that it does not have some major issue as to why it is trading at that price.
To start an investor on their journey, I have put together a worksheet that is meant to be used as a guide for due diligence of a particular company. Please visit http://www.iupsmip.com/component/option,com_remository/
Itemid,36/func,startdown/id,122/ to download an example of my analysis on Sherwin-Williams (SHW).
The fundamental analysis of a company is meant to identify any major underlying issues that the company might be facing, which should be understood before taking on an investment in that particular company. Such issues that might deter someone from making an investment in Sherwin-Williams might be the pending lead paint lawsuits that are in the courts now. My comfort in investing in this company is due to the fact that these cases are being thrown out of the courts and the company is not being found liable. I also see this company as a great long-term holding because it has consistently increased its dividend for over 21 years, considering their payout ratio is roughly 25%; the dividend is not at risk of being cut.
Here is a step-by-step process on how to fill out the fundamental analysis report, if you wish to do the analysis on a different company, please substitute the SHW ticker symbol with your chosen company’s ticker symbol.
| 1. Basic Company Information (Page 1) | |
| · Share Information · Market Data |
http://finance.yahoo.com/q/ks?s=SHW |
| · Company Description · Company Information |
http://finance.yahoo.com/q/pr?s=SHW |
| · Stock Price Performance | http://finance.yahoo.com/q/bc?s=SHW &t=1y&l=on&z=m&q=l&c= |
| · Investment Thesis | Filled after the report is completed |
| 2. Management Effectiveness (Page 2) | |
| · Return on Assets · Return on Investment · Return on Equity |
http://stocks.us.reuters.com/stocks /ratios.asp?rpc=66&symbol=SHW |
| 3. Company Management (Page 2) | |
| · Management Biographies | http://stocks.us.reuters.com/stocks/officers Directors.asp?symbol=SHW&WT modLOC=L2-LeftNav-11-Officers |
| · Management Compensation (Page 3) | Look at the officer compensation to decide if it is incentive-based or salary-based. Incentive-based would be if compensation is received in the form of stock options, meaning that the officer profits when the stock price increases. |
| · Change of Management (Page) | Has a new management team come in to turn around the company? Or is there a long-term management team in place? Taking a look at the stock price since the management team has been at the helm is a good indicator at what the market thinks of the management of that particular company. |
| 4. Analyst Report (Page 3) | |
| · Company Growth Areas | Growth can be found by looking at recent news and by analyzing the company’s Annual Report to find out the areas of growth. Internal growth includes areas such as research and development, innovation, international expansion; and external growth would be acquisitions. |
| · Classification of Company | State whether the company is a Value, Growth, or Income stock, or a combination of those. Please click on each of the classifications for a further definition. |
| · Analyst Recommendations | http://www.marketwatch.com/tools/quotes/ ratings.asp?symb=SHW&sid=4448 |
| · Analyst Up/Downgrades | http://finance.yahoo.com/q/ao?s=SHW |
| · Growth Expectations | http://finance.yahoo.com/q/ae?s=SHW |
| 5. Competitors (Page 4) | |
| · Graph of Competitors Performance | http://finance.yahoo.com/q/ta?s=SHW &t=1y&l=on&z=m&q=l&p=&a=&c= FUL,RPM,PPG,VAL,MAS |
| 6. Valuation (Page 5) | Insert the spreadsheet completed in the Comparable Ratio Valuation |
| 7. Trend Analysis | http://finance.yahoo.com/q/ta?s=SHW &t=3m&l=on&z=m&q=l&p=m50,m 200&a=r14,ss&c= |
| · Technical Analysis Write-up | Some of the areas I look at are Bollinger Bands, which are two standard deviations from a particular moving average. When a stock rises to the top of the band, typically, it will fall; the opposite occurs when a stock is at the bottom of the band—it tends to rise. Another indicator I like to use is the Relative Strength Index, which can identify oversold and overbought situations. |
Now that you have compiled all of the information into one place, you must then examine all of the underlying factors and determine whether the company would make a good investment. This is where you take into account the discount that you found the company to be trading at to its peers, then apply your fundamental analysis findings. You then will go into the report to the Investment Thesis section and state your decision and reasoning.
This does require some decision making on behalf of the investor, because in actuality, there are rarely any screaming buys available in the market. The best advice to be given is to diversify your holdings, smart money management is what a strategy that is not only smart but makes money. Feel free to check out the portfolio company holdings of the Indiana University of Pennsylvania Student Managed Investment Portfolio, which has used this fundamental analysis along with the Comparable Ratio Valuation to generate returns in excess of 4% over the market since inception (November 2006) with less risk.
Should you have any questions regarding basic fundamental analysis please feel free to contact me or leave a comment below.
