Stock Picking
Initial work done by all stock pickers is fundamental analysis. The goal of fundamental analysis is to find a stock’s intrinsic value, i.e. what the stockpicker believes the company is actually worth. If the stock picker believes the company to be worth more than the current share price, fundamental analysis would recommend that you buy the stock.
The perfect fundamental analyst may not be the perfect stock picker because of the irrationality of the market. Stock volatility is propagated by the drive of investors to make a profit from their investments. This extra layer of profiteering does not correlate with the underlying fundamentals of the company. Analysts will often also look at trends and tendencies in the marketplace. This is known as technical analysis.
If a fund meets the fundamental and technical criteria for selection, the next stage of the analytical process is qualitative analysis. Qualitative analysis looks at the more subjective qualities of a company. These include
- Who is at the head of the company, what their the background is, how long they’ve been in charge and how they got to be senior managers all come under the subsection of Management.
- Secondly, qualitative analysis requires an understanding what the company does and, therefore, how it makes money. A company may have excellent fundamentals and management, but if it is within an industry that is already highly competitive or dominated by a particularly large company it may well struggle. It is important therefore to understand the market in which the company is competing.
- Consider also the barrier to entry. Existing companies in industries such as pharmaceuticals have a massive advantage over new companies because of the costs involved, regulations, patents, distribution channels etc. A restaurant company, however, can set up with a minimal capital outlay and a low skill base.
- Qualitative analysis tells us not to underestimate the power of a brand name.
- Remember that any company can potentially be a good investment. If you see a local company doing well it may well be worth doing a bit of research.
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