Easy Fundamental Analysis Part 4
In this video, the speaker shows how to find a stock that performs well by using free tools available on the web. As an example, the speaker shows a chart for a company in the medical sector. He says that the health sector has historically been defensive during poor market performance, and this is a characteristic of a stock to add to a diversified portfolio. If you can't view the trading video above, you can watch it here. If you missed the previous video Part 3 is here.
So how does an investor easily find the stocks that are performing well in the market, and for free? First off, your broker has an arsenal of great tools available to pinpoint stocks based on a specific fundamental criteria.
If you want to use a service outside that of your broker, you can use free tools on the web. These are convenient if you don't want to over complicate things. One tool that the speaker says is representative of most of the tools on the market is the stock screener on Yahoo! Finance.
To open the tool, just go to the website and click on “Launch Yahoo! Finance Stock Screener.” This opens a new Java window. This tool is representative of most tools in the market, and shows a screen divided into segments. One section of the tool is for selecting the fundamental criteria and another section lists the results.
When setting a fundamental criteria, the speaker urges the investor not to over complicate things. The goal is to prove a stock's historical performance and to remove some of the unknowns that come with companies with erratic performance in the past or without any performance at all. In other words, you want to select criteria like profitability and return on assets or equity.
For this example, the speaker used the medical sector company GILD (Gilead) with a return on equity of 59 percent. To see this value, open the tool and plug in the values. Under sector, select healthcare. Next, select return on equity under profitability for the fundamentals. To simplify things, select “greater than or equal to” under conditions. The speaker sets the value to 5, which he says will give him a view as to what is normal for that particular industry sector.
After selecting your criteria and running the tool, the results will be displayed as a list at the bottom of the screen. When you sort the list from high to low ROE values, you easily get to see the outliers or those companies which are really NOT representative of the industry group as a whole.
Scrolling down the list, you'll see the “fat” of the industry group, in the 50s and 60s. Gilead's ROE of 59.7 indicates the company's proven ability to perform in the recent past. At the bottom of the list you will find the stocks that are still performing but at a much lower level than the average in that particular sector.
By selecting one criteria, the investor simplifies the stock screening process and does his best to remove risk. This analysis is limited, but remember that performance is ultimately going to come from how good of a portfolio manager you are, and how you constrain risk.
According to the speaker, another important criteria for stock screening is dividend yield. Dividend yield demonstrates a company's ability to perform and the management's attitude towards its shareholders.
Fundamental Analysis the Easy Way Part 4 Quotes
ROE values on the top...they're outliers. It's a bit like investing in stocks that are at their 52-week highs.
Am I squandering a little bit by constraining my searches to just one criteria? Well, no. Ultimately no analysis is going to perfectly predict what's going on in the market or the likelihood of one stock to rise compared to the market or compared to another stock.
Ultimately, your performance is going to come out from how good of a manager are you, how well you constrain risk, what are you doing as far as diversification and portfolio management.
In my opinion [dividend yield] is the most valuable indicator next to a number like return on equity which...answers similar questions about the company and about its performance.