Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed / discussed, i: incidental
Fundamental analysis (FA), valuation, value	01/5i,10i,12i - 02/8i - 03/2d/3i 06/3i + see valuation, fair value + prospective analysis + analysis presentation + other kinds of stock analyses seen in this glossary: behavioral, quantitative, technical.
Nothing but hard facts. Definition: The "fundamentals" (or economic fundamentals) of an asset comprise all important data and information about the characteristics of the asset itself and of the economy in general. If the asset is a stock For a stock, such information reflects the business and financial situation of: The company itself: Its accounts (financial results: balance sheets, income statements, for the last 5 years for example...), They show in particular the company's profitability, solvency and growth. Its current activity as well as its strategy and projects, Its resources, competences and management, And altogether its strengths, weaknesses, opportunities, threats (what is called a "SWOT" analysis). Its economic environment: Its economic sector(s), and the neighboring industries that can have an incidence on it/them. The company's market position relatively to the other players (customers, competitors, suppliers...) The local and global economies: economic growths, monetary aspects... Notably the evolution of the general "business cycle" as well as the long term macroeconomic prospects. Asset market information are not invited here Market mood, please wait outside! As seen, the elements above are strictly "endogenous" information, which exclusively address the company life in its economic ocean. Better stress the obvious: fundamentals do not include "exogenous" data about the asset's market behavior and performance (price, return, volatility evolution...). Thus fundamental analysis, however important for investment decisions, is not the only information that investors, even hard core "value investors", need or use. => See the other kinds of stock analyses mentioned in this glossary: behavioral, quantitative, technical. From fundamentals to asset valuation / business valuation / stock valuation Not only a figurative painting, but also its pro-forma invoice from the gallery. To investigate fundamentals is normally the core part of an asset valuation. When the asset is a stock (or more generally a business), what is called fundamental analysis (or just financial analysis, or security analysis or stock analysis) includes the following steps: 1a) Gather. and analyze fundamentals. 1b) Make rational projections on the company's future results. For more details about what elements are, studied, see the article below "Fundamental financial data".     2) From them, calculate what is called the stock (or business) "fair value" or "intrinsic value" (see valuation). Analysts try to estimate the theoretical / potential price that would reflect perfectly the general economic prospects and those of the firm. 3) Take into account that valuation, to deem if it is opportune to buy the stock - if possible with a long term view - or sell it Actually this is more the job of the decider than of the analyst. It is also up to him to determine its buying or selling "objectives". Another motive could be, before to grant a loan to a business or to buy its bonds (*), to evaluate its solvency. Here the purpose is to assess, not the firm's attractiveness as an equity investment, but its future repayment capacities. (*) But don't forget that whatever the goal of the analysis: * There are similarities in the aspects to investigate. Detectives are detectives and clues are clues. * Knowing the company's financial strength is crucial also for equity investment. EMH and fundamental) analysis Market shopkeepers tell you that the prices on their shelves are the fairest. They say the market already did for you the homework to assess the asset value. Hmm, better dig deeper by yourself to see if they offer you a rusty nail or a gold coin. The EMH (see that acronym) considers that the stock market quotes systematically the right price, by taking into account all available information (that includes even, in the strongest EMH case, the unavailable information that stay private). If we accept this theory and consider the market as a fair wizard, there would be no opportunity of arbitrage, no need to buy or sell (*). Thus, fundamental analysis - as well as any kind of analyses - would be useless. (*) Except maybe when the decider's risk attitude change, or when he needs the money back, or when he has a sudden inflow of it (congratulations!). Moreover, the EMH assumes also that the variable factor affecting prices and returns, and the "risk premium" (see that phrase) evolve in a random walk (RWH, random walk hypothesis). If we accept this, here again, there would be no need to make analyzes. We just could decide at random, as the fabled chimpanzee throwing darts on the newspaper stock quote page (the beast does not use a laptop). Magic, isn't? Between you and me, don't expect too much of that hypothesis, and don't always take market prices as their face value!

Fundamental financial data

01/5i,10i,12i - 02/8i - 03/2d/3i 06/3i + see valuation, fair value + prospective analysis + analysis presentation + the other kinds of stock analyses mentioned in this glossary: behavioral, quantitative, technical.

Looking at the horse from all sides to guess its potential value. To do its job, a fundamental analyst collects and combines information (called fundamental data) from: Outdoor 1) The general macroeconomic situation (interest rates, exchange rates, economic growth..), 2) The economic situation of the main industries and markets, The geographical locations' traits and economic prospects, Situation and evolution of the customers, Situations of the industries in which or with which the firm operates), Indoor 3) The firm's historical and current fundamentals: Financial data: figures from the past and present income accounts and balance sheets, For example, analysts love to calculate financial ratios and to compare them * From year to year * Also with similar corporations. Economic information: organization and means, markets, growth, profitability, solvency..., 4) Its business projects and its economic and financial prospects and risks (which entails to do scenarios and estimate their probabilities) Obviously, what are lacking here are the market attitude-making elements. Behavioral analysis supports fundamental analysis, as a needed effort to start with a rational valuation, but BA adds another step: the analysis of the stock "profile" and an estimate of its "image" bracket (see those words). More precisely, for a fundamental valuation, what key expected financial data to use? Discounting the future. The task is complete only after a calculation gives what is considered a "fair" value estimate. There are various criteria for this calculation, linked to the company performance or to investor interest, which normally would converge: If seen from the point of view of: This value calculation can be based on: The firm's performance and profitability The firm's expected cash flows, And / or its expected earnings growth The investor's interest The expected dividends, Plus the expected resale value of the firm / the stock at the end of the prevision period. To compute the value, all those expected goodies are discounted with an adequate rate of return that includes a market risk premium (see an example in the "expectancy" article).

Fundamental investors / traders

02/10i + see fundamental analysis, value investing, growth investing, PER effect

Is it worth the price? Fundamental investors are those who base their buying / selling decisions on fundamental analysis / fair price valuation. Serious fundamental analysis supposes a lot of homework to scan the firm's situations and to build prospective profit / risk scenarios. Some narrower "fundamental" analysis / investment schools, with their own biases Value or growth? State your market religion! Some investors are anchored on only some fundamentals aspects, by using - as an heuristic - simplified benchmarks. This makes for narrower schools of thinking among fundamental investors, with their own bias, such as: 1) Investors that are set on "value investing" (see the detailed article). They try to buy stocks that became underpriced (value stocks) Their main criterion (*) is usually related to the present profits (**) of the firm, compared to the present stock price: see PER (P/E) - Price-earnings ratio. (*) For "pure" value investing. In a more flexible approach some future projection is also done. (**) and/or, for some of them, on the present book value (see PBR - P/B). That practice might explain what some theoreticians consider, under the names of P/E effect or P/B effect, that a low P/E or P/B is a good predictor of a price rise. On the other hand, this focus on current data might also explain that analysts stay anchored on past evolutions, while dominant investors might bypass them to detect better the stock recovery prospects. 2) Investors looking for "growth investing" (see the detailed article). They focus on the past profit growth, and extrapolate it in expected profit growth. One simple tool for growth investors is to use PEG ratios (Growth rate / PER) as stock benchmarks.

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