Topic: Value Stocks

Here’s a look at what fundamentals to look for in a stock as part of building a successful portfolio

tsx value stocks

Understanding what fundamentals to look for in a stock will help you decide if it’s a sound investment for your diversified portfolio or not.

Company fundamentals are essentially a firm’s financial numbers. Do you know what fundamentals to look for in a stock? These include the company’s balance sheet, statement of cash flows, and income statement, as well as other measures can highlight the health and growth prospects of a company.

Focusing on fundamentals is a key way long-term investors look to spot stocks to consider adding to their portfolios.

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Know what fundamentals to look for in a stock and consider using a “bottom-up” approach to investing for better results

Using a stock’s fundamentals is also known as “bottom-up” analysis. Using the bottom-up approach, you focus on understanding what’s going on, rather than trying to predict what happens next.

You could call this descriptive finance. You delve into earnings, dividends, sales, balance sheet structure, competitive advantages and so on. From there, it quickly becomes obvious that there’s an awful lot you don’t know about the risks in the investments you are considering. So you try to design a portfolio in which the risks offset each other.

Over periods of five years and beyond, top investment honours usually go to members of the bottom-up crowd. That’s partly because bottom-uppers tend to make fewer big mistakes. This lets their gains accumulate. This also leads to longer holding periods, which provide greater tax deferral and lower brokerage costs. 

Use technical analysis as part of your stock investing fundamental analysis 

Use technical analysis to support—not determine—your view of a company. A far better approach is to look at chart reading as one tool among many. But don’t focus on how to read stock charts as a way to predict what’s going to happen. Look to see if the pattern on the chart seems to support your view of the stock, based on its finances and other fundamentals. But remember that the stock market follows a multitude of factors to varying extents, and the most important or influential factors continually change.

It’s encouraging if your analysis and the chart seem to match. But sometimes they don’t. If a company looks promising, but its chart shows a lengthy falling trend, insiders may know something you don’t. That’s when you know you have to dig deeper, and perhaps wait until the situation clarifies itself.

Know what fundamentals to look for in a stock: Hidden assets

Hidden assets are valuable assets that some investors overlook, discount or disregard altogether. They have special appeal for companies that are using takeovers of other firms to grow. They can be found in real estate and in research spending and elsewhere.

If you buy a stock for its hidden assets, and those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it can’t hurt you much. By definition, a stock’s hidden assets have not had much impact on its price so far. If you paid little if anything for the assets, you have little to lose. But the best hidden assets will eventually expand a company’s profits, grab investor attention, and push up its stock price.

You should always look for hidden assets while evaluating a stock. If you find them, it will add to the appeal of any stock with sound bottom-up fundamentals.

Here are some other factors to watch for when deciding what fundamentals to look for in a stock

Here are some criteria to look for in stocks for your diversified Successful Investor portfolio: 

  • 5 to 10 year history of profit.
  • 5 to 10 years of dividends.
  • Manageable debt.
  • Industry prominence if not dominance.
  • Freedom from business cycles.
  • Ownership of strong brand names and an impeccable reputation.

Bonus tip: Here are two ways to profit in this decade

  • Disregard predictions, market indicators and short-term trends. Market indicators, never a great investor aid, depend on the belief that the past is a guide to the future. A great deal has changed in the past few years. Indicators are more likely than ever to let you down.
  • Focus on business opportunities. Only invest in companies and stocks that seem to have a chance to prosper in this new environment. Don’t buy just because a stock has a high yield or low P/E, or a lot of fans among brokers and the media. It’s far better to buy because it seems to have an edge over its competitors.

At TSI Network we start our analysis of any stock by looking at its fundamentals. But above all, we recommend that you follow our overall three-part Successful Investor philosophy:

  1. Invest mainly in well-established, dividend-paying companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight. 

What fundamentals do you look for first when deciding on a stock? 

How much faith do you put in a stock based on your reading of its fundamentals?

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