Fundamental Analysis 101

USING THE DATA

I initially invested in Value Line's introductory offer to examine its service and I got hooked. Value Line rates 1,700 stocks in their primary list and 1,800 stocks in their supplemental list. The primary list is divided into 13 sections, and each week a section is updated, in rotation, so that no data is older than 13 weeks. Each week, a summary lists 1,700 stocks with timeliness ratings of 1 to 5, with 1 being the highest rating and 5 the lowest. Timeliness refers to the expected appreciation in the next 12 months. The summary also includes a list of 97 industries ranked in order of expected appreciation in the next 12 months, as well as a list of the stocks within each industry.

Let's say I can't find a bond or a bank that pays much more interest than my mattress, so I decide to invest some money in one or two stocks. I don't want to buy a stock that no one else wants, so my first screen is the industry list. I only consider stocks in the first 10 industries. (Of course, you may wish to broaden or narrow this base.) Then I screen the stocks in these industries, looking for stocks that are rated 1 or 2 for timeliness. This gives me my first list of candidates. But just as in charting, I need some confirmation.

Investor's Business Daily is a great newspaper that any independent investor will find helpful. In addition to everything you find in other papers, IBD features a SmartSelect rating for each stock. The ratings range from 1 to 99, with 99 being the best. These ratings include earnings per share (EPS), relative strength (RS), industry group relative price strength, a combination of sales + profit margin + return on equity (ROE), accumulation/distribution (A/D, rated A to E, with A being the best), and volume percent change.

I only use EPS, RS, and A/D. I scan the list I made from Value Line and look for stocks that have EPS > 89, RS > 79, and A/D of A or B. It is not surprising that my investigations into both Value Line and Investor's Business Daily yield similar results in terms of attractive stocks. However, when a stock is a 1 or a 2 in VL but has an EPS of only 88, some subjective decision has to be made using other confirming data.

Another of my confirming sources is Standard & Poor's Stock Screens, which rates approximately 1,100 equities for greatest appreciation potential over the next six to 12 months. Stocks are rated with one to five "stars" (five being the best); the stars stand for STock Appreciation Ranking System. I look for stocks in my list that have four- or five-star ratings.

This is a relatively simple process, and the doing takes less time than the telling. The system has worked well for me as a screening tool for finding stocks to add to my charting program's watchlist for technical analysis. Fundamentals do not change very rapidly, and a lot can happen to a company before a change in fundamentals is publicized. The charts show what is happening to a stock's price, regardless of what should be happening. Fundamental analysis tells you if a stock is a good buy candidate. Technical analysis helps you make the buy decision.

In Figure 1 you see an Excel spreadsheet model that analyzes fundamental criteria. The logic for column J is:

AND(B5>89,C5>79,(OR(D5="A",D5="B")),(OR(F5=1,F5=2)),(OR(H5=5,H5=4)))

Figure 1: Keeping track. Here is an example of how I decide which stocks to watch.

Rudy Teseo is a private equities and options trader and has conducted courses in option trading and chart analysis. He can be reached at rftess@juno.com.

REFERENCES
Value Line: www.valueline.com

Investor's Business Daily: www.investors.com

Standard & Poor's Stock Screener: www.stockinfo.standardpoor.com/screens_pr.htm

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