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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis
Introduction to Fundamental Analysis Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions


Income Statement Analysis

 - Great companies and good
    EPS growth do not guarantee
    stock market profits
 
- The P/E ratio can create
    buying opportunities


 - Mishaps can create steals

 - Unusual charges reduce the
    value of your stock

 - ROE is the single best tool
    for investors

 - ROA is another valuable tool

 - Investors pay for high profit
    margins

 - Lenders can eat up all the
    profits

 - Depreciation creates
    deferred taxes, which have
    equity-like qualities


 - EPS is a complicated
    calculation

 

 


Mishaps can create steals

Many buying opportunities present themselves when companies report unusual charges, and their stock prices drop to unrealistically low levels, while their future earnings capacity remains intact. Moreover, the potential upside can be compounded in a down market. Buyers need to understand the charges and their future impact on the business. Being able to act under adverse conditions is essential. The best scenario is when “good” companies (best of breed) stumble, in a soft market, creating buying opportunities that would otherwise be unavailable.

Differentiating between “good” and “bad” companies is a skill. The risks are high. The bad companies may never go back up in value; their problems tend to mount. It can get bloody trying to “catch a falling knife.”

The key is only to invest in quality companies with demonstrated histories. Some of the aerospace and defense companies, like Lockheed Martin and Raytheon, for example, suffered multiple business setbacks in the late 1990’s, only to subsequently recover, principally because they were well managed organizations with recurring customers. Seal Air and Fresenius Medical Care are additional examples. Their stocks fell sharply in 2002, mainly because of their exposure to W.R. Grace’s asbestos litigation. This created two very good investment opportunities in excellent companies at attractive prices. In essence, you are looking for a “best of breed” company that has temporarily stumbled, with the market negatively overreacting. In a weak market, the downside can be magnified, resulting in fantastic buying opportunities.

 

 

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