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I'm completely new to stocks. I've already read The Intelligent Investor, One Up On Wall Street and another book for beginners about long term investing.

My problem is that I don't know at all how to do a thorough fundamental analysis (to be able to calculate the fair price / intrinsic value). I've checked Investopedia, the following questions and more but cannot find a step by step example, especially using discounted cash flows.

How to evaluate stocks? e.g. Whether some stock is cheap or expensive?

Recommendation for learning fundamental analysis?

Most effective Fundamental Analysis indicators for market entry

How you make decision on a stock purchase after fundamental analysis?

How would I use Google Finance to find financial data about LinkedIn & its stock?

Should I use a tool like Finbox to calculate the fair value? For example, here it shows Apple's intrinsic value:

https://finbox.com/NASDAQGS:AAPL.

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    If fundamental analysis worked, stock pickers would make money. Overwhelmingly, stock pickers lose money. Tremendously overwhelmingly, "funds" lose money. (Trivial "index funds" crush all funds, forever and always.) Although it might be advisable/admirable to know about some commonly used "fundamental" figures, I think it's worth realizing that (A) there's absolutely no standard or "definitive" "fundamental" analysis and (B) it's overwhelmingly an utter failure, so bear in mind your goals. – Fattie Jul 16 at 15:33
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You will never find a step-by-step example. It does not exist. You should buy the fifth and sixth editions of Security Analysis, by Graham and Dodd. The fifth edition was written in 1987, the sixth in 1943. No, that is not a mistake.

The revised version of the 1943 edition (commented rather than revised to bring it current to the newer accounting standards) will tell you why you are doing what you are doing. The 1987 version will tell you how. The two together are around 1700 pages. Nowhere in those 1700 pages will you see one example that covers everything.

What you are doing is restating every single item on the balance sheet, income statement and connected statement of cash flows to their economic values instead of accounting values.

For example, imagine a firm has deferred taxes of 100 million dollars as per Generally Accepted Accounting Principles. The firm is a U.S. firm and uses MACRS for tax purposes resulting in GAAP book versus tax book timing differences. Imagine the present value of the tax is 60 million dollars as most of it will not be due for decades. What happened to the other 40 million? It is really equity.

However, when you change tax liabilities you also change income and possibly categories of cash flows. Your cash flows, on a net basis, should be unchanged but may vary on a gross basis. You may want to identify those changes as they may convey information even though final cash flows will end up in the same place.

There is another problem, some firms may need to completely write down their intangibles for analysis purposes but for another firm that would be incorrect. There is no one real firm that embodies all possible changes that could be made. In the real world, there is no universal example.

There doesn't exist a step-by-step example because electrical power generators are very different from stores that sell ice cream. The way you would deconstruct a power producer such as Duke Energy is not how you would deconstruct Baskin Robbins.

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I'd say the most important things are to:

  • Calculate the debt-free relative price of the stock. Some people use EV/EBIT, but then it doesn't account for taxes, so I'd say a tax-modified EV/EBIT would be good. This takes correctly into account the capital structure of the company so companies in debt don't seem like such a good idea anymore (hint: they're not a good idea)

  • Analyze not only a company but the competitors of the company.

  • Analyze companies that operate in different fields. It may be the case some field is undervalued and some overvalued, and you should invest then more to the undervalued field and less to the overvalued field. Remember good diversification, though.

  • Analyze what is the sustainable dividend yield for the company. How much capital they need for the growth level you can expect from them? How much money can be divided to the shareholders?

  • Analyze the growth opportunities of the company. Know your Gordon's formula. I typically like to put the Gordon's formula into this form: total_yield = growth + dividend_yield.

  • You may too take into account the P/B ratio, but do remember that inefficiently used capital is not providing value for you, and low P/B ratio companies may often have inefficiently used capital.

  • Analyze the debt structure of the company. How long contracts are the debt contracts, i.e. how quickly does the debt need to be refinanced? If the company is relying on the willingness of creditors to refinance the short debt again, again and again, in a slight marked downturn it can will immediately fail.

  • Do a reality check. Do you use the products of the company? How much? How big chunk of the company you need to purchase to produce the products of the company you use? Does the price of that chunk of the company seem sensible?

  • Lastly, remember to diversify. When doing fundamental analysis, you may often want to put most of your money into top 3 picks since they look like such good deals. You are taking a huge risk if doing that!

I'd say if you calculate a "fair value" for the stock, you're doing it wrong (although I understand many people like to think in terms of a "fair value"). You should instead calculate a "fair yield" for the stock, and prefer stocks where the "fair yield" is higher than ordinary.

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