News You Can Use 9/28/00

Fundamental Analysis 101

     What are the basics of fundamental analysis? The most basic area of fundamental analysis, and the easiest to perform, is a review of changes in earnings and revenue. It's the easiest area of fundamental analysis because most earnings reports are released with a comparison to the same period during the previous year. Just open the Wall Street Journal or Investors Business Daily and the earnings comparison is right there. IBD prints earnings reports under different headings whether they are up or down. Sometimes you need to wade through extraordinary expenses and items relevant to continuing operations but usually the pertinent numbers can be deciphered. You can subjectively look at the reported earnings growth and look for percentages that look attractive. Most people probably do little more research than that, but there are other ways to evaluate the earnings information. Comparing the earnings to other companies in the same business is very helpful. If you don't make this comparison you'll probably be lead astray. A 15% increase in earnings or revenue may be great for a grocery store chain, but is comatose for an Internet company. The trading volume of a stock can give an indication of the direction of a stock. Heavier than normal volume is an indication something is going on. Recent company press releases on new products, alliances, or executive changes can cause trading volume to increase significantly above the average daily volume. The WSJ and IBD use different formats on their stock pages to flag stocks trading a certain percentage above their average volume. A stock trading up on heavy volume is a good indication an event has occurred that is getting a positive opinion by institutions and other investors. Conversely lower stock prices on heavy volume may be a good indication it is time to exit a stock you currently hold. Momentum, accumulation, and distribution are all terms frequently used in the media that are based on trading volume.

    Legal insider buying and selling is another area to watch. Corporate officers are required to file with the SEC their intention to buy or sell shares in their company. More and more frequently companies providing venture capital, legal, advertising, or web development services to newer publicly traded companies are receiving all or a portion of their compensation in company stock. These associated firms also need to file the appropriate forms with the SEC when they intend to sell their shares in the company. This "insider" trading is regularly reported in the financial press and by the financial broadcast media. Stock sold by firms that have received a part of their compensation in stock can generally be ignored since they are just trying to make liquid some of the money that is owed them. Sometimes these are the majority of the SEC filings reported and can cloud the real buying and selling by insiders. Insider selling can occur for many reasons such as buying a new house or boat, but a heavy number of shares sold by a large number of officers should be a red flag. On the other side of the coin there is only one reason insiders buy stock, and that is they believe it is a sound buy at a good price. When insiders buy others should buy. This is just a brief overview of fundamental analysis and there certainly is more the individual investor can learn on the subject.

QUOTE:  "The road to wisdom is simple… err and err again, but do so less and less." -- Piet Hein

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