Fundamental Analysis INTRO: When someone looks to purchase a stock what type of research and analysis shouldn’t they be concerned with. Whether a broker assists you or you’re picking stocks yourself you should be aware of some basic principals. Here to help us today is Bruce Hagan, certified financial planner with RAI Investments and Corporate Securities Group. Q1. Bruce, are there general approaches to stock analysis that we should be familiar with? A1. Yes, even if you rely heavily upon a professional for stock selection you should be familiar with some of the basics. The two traditional and well-known approaches to selecting stocks are fundamental analysis and technical analysis. Many professionals, myself included, will utilize both methods when analyzing a stock. Today we’ll discuss the more widely used one, fundamental analysis. Q2. O.K., give us an overview of fundamental analysis. A2. Fundamental analysis is based on the premise that any security has an intrinsic value, or the true value as estimated by an investor. This value is a function of the company’s underlying variables, which combine to produce an expected return and an accompanying risk. By assessing these fundamental determinants of the value of a security, an estimate of its intrinsic value can be determined. This estimated intrinsic value can then be compared to the current market price of the security. If your analysis leads you to believe the intrinsic value of a stock is $25 per share and it’s trading in the market at $30 a share you would probably see little reason to own it. But if it were trading a $15 a share, you would consider it a purchase candidate. Q3. Is this a fairly simple thing to do? A3. No, it’s not. Keep in mind that the market price of a stock is basically the consensus view of all the buyers and sellers of that stock of the worth of the company. So if your analysis indicates the intrinsic value is significantly different from that consensus view you are interpreting data or expectations differently from the herd. Investors, who can accurately determine such a discrepancy, should be in a position to prosper: but it’s not easy. Q4. How would one go about performing fundamental analysis? A4. There are two schools of thought: the "Bottom-Up" approach and the "Top-Down" approach. The bottom-up states that if you can identify a company with good long-term growth prospects, you buy it almost regardless of other factors. The top-down approach begins with the bigger picture and works down. You would begin with the economy and overall market, considering such important factors as interest rates and inflation. Next you would consider industry groups or sectors that may perform well. Finally, having decided that macrofactors are favorable to investing, then individual companies would be analyzed. Q5. So what tool would you use to try to determine proper stock values? A5. There are very many and I’ll mention some of them: business and industry cycles; earnings stream and price to earning ratios; dividend growth; strength of the balance sheet; return on assets; management effectiveness; product acceptance and development. These are only a few.’ Alternate question: Q. I know people look at P/E ratios. Is that a good tool? A. Yes it certainly can be; but be aware that acceptable price/earnings ratios can differ widely from one industry group to the next. It’s not as simple as saying this utility stock has a P.E. of 15 and this software company’s PE is 25 and therefore the utility stock is a better buy. Be sure you’re comparing apples to apples. The discussion offered above and in the movie should not be considered an endorsement by Florida State University. They are offered in the educational sense of providing thought-provoking information for our Web audience. Copyright shared with Florida News Channel (FNC), all rights reserved. Broadcast 2/25/00