Simply put, fundamental analysis attempts to uncover underlying strengths and weaknesses of a company and its stock by identifying a company’s competitive advantage, earnings growth, revenue growth, and the quality of management.
All in an effort to figure out:
- Is the stock overvalued / undervalued?
- Is it trading at or below future growth, per its price to earnings growth ratio (PEG)?
- Is the company making a profit?
- How does the stock trade in comparison to overall sales?
- Where does the company stand with regards to competition?
Billionaire Warren Buffett subscribes to fundamental analysis, for example. And, as we all know, he’s swimming in money because of it. Using fundamental arguments, Buffett bought more than billion dollars’ worth of Coke (SYM: KO) in 1988.
Buffett saw consistent performance and good long-term prospects based on the nuts and bolts of Coke. He also saw a bargain in the stock price after years of disaster.
The stock, said Buffett, wasn’t reflective of the growth set to occur in the company’s international business. So, he bought in 1988, and watched his $1 billion investment in Coke explode to $12 billion by the close of 1999.
Peter Lynch and Benjamin Graham are some other top names that come to mind, as top fundamental analysts. Fundamentals gave them a better understanding of the companies they were investing in, the health of the company, and an idea of future growth.
