Today we're going to take a look at some fundamentals because Carl has submitted one question about that topic. You can also submit a question by writing one, or you can send it by voice.
Here is Carl's question:
What is the most important thing to watch when it comes to fundamentals? Do I need to dig deep into the financials and the reports or what should I do with all these company financials?
Well, we focus a lot on technicals. And we do that because stocks typically move based on technicals.
There are fundamentals out there but typically when stocks have great charts they will have great fundamentals, and when you have great fundamentals you usually have great stock charts.
They work that way. However, when there's panic when you have stocks moving in a euphoria fashion, it's because of the technicals not so much of the fundamentals.
Usually, fundamentals are slow to move, because these companies are enormous. And it's a significant investment for them to make a change and it will take serious time to do that.
By the time they implement new change, it takes a couple of years for that process. Because of that, you need to look at fundamentals.
Crucial Things You Should Focus On
What you are looking for is a long term projection. If you're a long-term investor (5+ years), the number one thing to watch is earnings. That is the key because there are only two scenarios:
- They are making money
- They ARE NOT making money
Quite often companies can fudge their earnings a little bit.
Here's what they can do:
- They can pre-ship products in advance
- They can cut employees
Firing people is generally a good thing for stocks because the company saves money. It's not good for the regular person but for stocks is - they love it.
The thought process of those companies is the following:
The fact that we can do the same amount of work, and we can make the same amount of money, and have fewer expenses is excellent. We can fire 10% of our workforce, great!
People that are getting fired don't like that, but this is the way as it is. Be aware of that fact. You're looking for 20+ % - that's a real growth company. If you're looking for stability; 5% or 10% earnings growth is good enough.
You could pull this information up on NASDAQ, and you go to the company growth, analysts, research, forecast, growth. For me, Yahoo Finance is better and does an outstanding job with a lot of fundamentals.
Yahoo Finance Is Going to Help You Big Time
If you go to Yahoo Finance and type in McDonald's you can look at it here is what you can find overall stock and financials. If you want to go deeper into financial reports (annual and quarterly), you can hear what the earnings are.
But the reality is that it's tough to understand these things at a regular consumer level. That's because they bury things also in different accounts and everything is in so many separate compartments, especially with these big companies.
To simplify things you have to focus on these things:
- What's the income
- What's the continued operating expenses
- What're the recurring events
- What's recurring income
- What's net income
That's the bottom line. And one more thing.
As I mentioned before if you're looking at earnings that are making a 5% on earnings - that's not a huge growth company. Now, that doesn't mean you always want mega growth companies, but typically 10%-15 % earnings growth year after year is the real deal.
Quick note: You have to compare January to January of the previous year. Not of this January to April because if you compare that you're in different seasons.
If you want to dig deep into the balance sheets and income statements you could do that by looking at revenue and the loss (operating income). You have to analyze all the data, and it can be overwhelming.
After a while, you'll ask yourself:
How do you can handle this as a regular human being? Honestly, unless you're an accountant, it makes it extremely tough.
Something like this can help you more than any statistics: If you hear a guy from a big company that is saying that the sales of the iPhones are slipping - that's not a good thing.
And what you want to do is start looking at these things at a bigger picture. If you have the urge to dig deeper into it, but also want to keep it simple, all you got to do is look at earnings and earnings growth.
That's what you're looking at - are they beating their earnings or not. We're looking at what's expected and what's achieved. As long as they keep moving up, that's a good thing.
Otherwise far as fundamentals go, I wouldn't stress too much on revenue research development.
Find a Breakdown of Product Sales In Apple Using statista.com
Let's take a look at the product category. This is what you want to look.
Look they're making the majority of their income (50%) from iPhone. Well, imagine if that iPhone starts having problems. Then there might be a lot of issues.
In 2019 from iPhone is coming 61% and only 8% from the iPad. Amazing. You can assume that if they launch a new iPad that it's not that exciting, right? Unless it's a huge revolutionary thing but in this case look at their core product lineup. Only pay attention to that.
Anyways that's what you want to do when it comes to fundamental analysis. You don't have to make it that complicated.
Follow These Main Principles
I don't dig deep into these reports. That requires lots of time, and you have to go through lots of data that most of the time doesn't make sense.
If earnings continue to beat over the last year or two chances are that they'll continue to beat over the next few years as well. When you're looking at choosing a company or stock to invest in, and you're looking for it based on fundamentals you're usually doing it because of the long term.
Don't do it for a short quickie. If you're doing it for a quickie, you want to look at technicals because those move more on a rapid basis, but for the long-term look at earnings, you don't have to dig that deep into the financials.
That's because you'll probably get confused anyway. Even accountants don't understand all of that.
For conclusion, I would say look at those earning reports and make sure that they're beating quarter after quarter and from a quarter of the previous year.
And when you do that and if everything looks okay then it should be a good company. What's almost certain is that if it was a good company over the last ten years and it continues to grow then probably, it will be still good for the next ten years.
Make logical and healthy decision stock based on general knowledge and looking at the charts for the longer term - seeing how these stocks have been performing over the last five or ten years. And if they've been doing fine, then they should continue to do well.