I am new to Fundamental Analysis. I purchased a few books on the subject which has proven valuable but time consuming. I was wondering if anyone with more experience than myself can recommend the indicators they find most effective for fundamental analysis, considering a company's Income Statements, Cash Flow and Balance Sheets, etc. What are some effective entry flags / indicators when considering fundamental data?
Thanks in advance!
Unfortunately, there is very little data supporting fundamental analysis or technical analysis as appropriate tools to "time" the market. I will be so bold to say that technical analysis is meaningless. On the other hand, fundamental analysis has some merits. For example, the realization that CDOs were filled with toxic mortgages can be considered a product of fundamental analysis and hence provided traders with a directional assumption to buy CDSs. However, there is no way to tell when there is a good or bad time to buy or sell. The market behaves like a random 50/50 motion. There are many reasons for this and interestingly, there are many fundamentally sound companies that take large dips for no reason at all. Depending on your goal, you can either believe that this volatility will smooth over long periods and that the market has generally positive drift. On the other hand, I feel that the appropriate approach is to remain active. You will be able to mitigate the large downswings by simply staying small and diversifying - not in the sense of traditional finance but rather looking for uncorrelated products. Remember, volatility brings higher levels of correlation. My second suggestion is to look towards products like options to provide a method of shaping your P/L - giving up upside by selling calls against a long equity position is a great example. Ground your trades with fundamental beliefs if need be, but use your tools and knowledge to combat risks that may create long periods of drawdown.
It’s your job as investor to do due diligence for any company you invest in. Quarterly earning reports are probably the most basic info you should read. Though everybody has access to you, it will help you build a mental valuation model for the asset you invest in. In an event of a market downturn or rally, how much you know about the asset you invest in always dictates if you can make a profit.
As for what specific indicators you should look at, it varies a lot.
For a restaurant, you’d probably want to look at how fast and how cheaply they are in acquiring new customers. In general, expenses related indicators are more important.
For a fast growing SaaS company however, you probably want to focus on top-line growth in revenue. Expenses are less important considering it is growing fast.
For a bank, you want to look at liquidity and leverage.
The SEC filings are publicly available but the interpretation really depends on the sector, industry, and business cycles. You can download query all the financial indicators and SEC filing for every U.S company here. Though you must interpret them based on a number of other factors
I think by definition there aren't, generally speaking, any indicators (as in chart indicators, I assume you mean) for fundamental analysis. Off the top of my head I can't think of one chart indicator that I wouldn't call 'technical', even though a couple could possibly go either way and I'm sure someone will help prove me wrong.
But the point I want to make is that to do fundamental analysis, it is most certainly more time consuming. Depending on what instrument you're investing in, you need to have a micro perspective (company specific details) and a macro perspective (about the industry it's in). If you're investing in sector ETFs or the like, you'd be more reliant on the macro analysis. If you're investing in commodities, you'll need to consider macro analysis in multiple countries who are big producers/consumers of the item.
There's no cut and dried way to do it, however I personally opt for a macro analysis of sector ETFs and then use technical analysis to determine my entry and/or exit.
The three places you want to focus on are the income statement, the balance sheet, and cash flow statement. The standard measure for multiple of income is the P/E or price earnings ratio For the balance sheet, the debt to equity or debt to capital (debt+equity) ratio. For cash generation, price to cash flow, or price to free cash flow.
(The lower the better, all other things being equal, for all three ratios.)
Fundamental Analysis can be used to help you determine what to buy, but they won't give you an entry signal for when to buy.
Technical Analysis can be used to help you determine when to buy, and can give you entry signals for when to buy.
There are many Technical Indicator which can be used as an entry signal, from as simple as the price crossing above a moving average line and then selling when the price crosses back below the moving average line, to as complicated as using a combination of indicators to all line up for an entry signal to be valid. You need to find the entry signals that would suit your investing or trading and incorporate them as part of your trading plan.
If you want to learn more about entry signals you are better off learning more about Technical Analysis.
