How To Pick Winning Stocks Using Fundamental Analysis

Written by Julie Brownlee on March 6th, 2017

How To Pick Winning Stocks Using Fundamental Analysis

What if I told you that all companies have “secret signals”?

Signals that tell you EXACTLY which companies to buy, and which you should avoid!

Think about how much easier that would make your life…

But what are these “secret signals”, and how exactly do you decipher them?

Well, it all comes down to Fundamental Analysis.

Fundamental Analysis is the cipher, or key you need to decode these signals.

And when you do, uncovering winning stocks becomes simpler than you ever thought possible.

Let me show you…


BONUS: Discover the 9 must-have ratio's you can use to uncover the best money-making stocks! It's all in this FREE fundamental cheat sheet: 

Embed Content Upgrade


What Is Fundamental Analysis?


Unlike technical analysis, which involves examining chart patterns, fundamental analysis takes a more holistic approach.

Your goal is to work out what the intrinsic value of a stock is.

To achieve this you can examine a wide number of factors, including how a company is performing along with other companies within the same sector and what’s going on in the economy.

Once you know a stock’s intrinsic value, you can use it as a basis for picking winning stocks.


How To Get Started


To be in the best position to pick fantastic long-term stocks, you need to know where to find or how to calculate a number of key ratios.

These ratios will show you where opportunities lie.

The most relied upon and used ratio is without a doubt the price to earnings (PE) ratio.

This is a good starting point.


How To Calculate The PE Ratio


This ratio is widely available and it’s unlikely you’ll need to work it out for yourself.

But in order to understand exactly what the ratio looks at, you need to know how to calculate it.

The PE ratio is simply a stock’s current share price divided by its most recent earnings per share (EPS).

Broadly speaking, the higher a PE ratio, the more over-priced a stock is. Conversely, the lower a PE ratio is, the more under-priced it is.

A good start is to compare a stock’s PE ratio with its industry’s PE.

If it is less than the industry average, you could be onto a bargain.

But you need to investigate further to be sure...



What About Dividends?


If you’re investing for the long run, dividends should play an important part in your stock picking.

Dividend paying companies tend to be established, solid businesses and they can make excellent long-term plays.

Dividend history can also tell you a lot about a company.

So what should you look for?

Firstly, you’re looking for consistent dividend pay outs over the years.

As a start, have a look at dividend yields. This ratio is available online or in a newspaper’s share pages.

The dividend yield is a percentage showing you a company’s annual dividend pay-out divided by its current share price.

The higher the dividend compared to the price, the higher the ratio.

Since the financial crash led to global economies tightening up, some companies have had to cut their dividends as a result.

With this in mind, look for firms that haven’t cut their dividends and ideally have continued to increase them over the years.

If you find a stock that fulfils this, you need to then check how the company is paying its dividends.

This should never be at the detriment of the business, so look for dividends coming out of retained earnings or its current earnings.

If you find a company is using borrowed money to fund dividends, take a wide berth.


The Warning Sign NO Investor Can Afford To Ignore


You need to see if the company in question is debt laden.

Stocks can look good, but if you dig a little deeper, the company is up to the eyeballs in debt.

This isn’t a good thing for a number of reasons.

Number one, servicing debt is expensive. Plus, if interest rates rise, so will the cost to pay back borrowings.

Number two, high levels of debt means more risk.

And, number three, high debt levels can make a company look like it's performing better.

To see how much debt a company is carrying, calculate its debt ratio.

This is a company’s total debt divided by its total assets.

Debt ratios differ amongst different industries, so compare it to other companies within its sector.

This will allow you to see what the sector norm is.

The debt ratio helps you to work out if a company is actually good value or not.


The One Thing You Need To Look At BEFORE Investing For Dividends


Another useful aspect to look at is a company’s free cash flow.

It can give you a more concise picture of what’s going on within a business compared to looking at earnings alone.

By knowing a company’s free cash flow position, you can see whether or not it’s in a good position to pay dividends or debt off, and grow.

Growth is essential to a company continuing to perform over the coming years.

To calculate free cash flow, take a company’s capital expenditure away from its cash flow from operations.

A company’s free cash flow will increase when it’s growing its revenue, running more efficiently and eliminating debt.

If you find a stock trading at an attractive price with rising cash flows, this is an excellent indicator that earnings are going to rise too.

And rising earnings mean a rising share price ahead.

On the other hand, if a company’s free cash flow is on the demise, this will no doubt have a knock on effect in the future and pull earnings down with it.

This can lead to a firm taking on more debt and is a stock to avoid.


What A Company’s Financial Statement Can Reveal


When a company releases its financial statements, it will also include projections for the future.

For instance, what it expects its earnings to be in the coming quarter, six months or year.

Take a good look at these projections.

If a company is cutting forecasts, it’s time to sit up and take notice.

This means it foresees harder times ahead, which probably isn’t good news if you want to invest.

Ideally, you want to see forecasts that show solid growth.


How To Uncover Winning Stocks


There is no magic formula to finding stocks that are going to outperform over the years ahead.

But what you can do is apply your time and energy to examine the aspects we’ve looked at above along with other economic factors.

If you find a specific stock that’s showing good value and promise for the future, try to envisage what the economy has in store and the impact this will have on the business.

To make a good long-term investment, it’s vital you don’t overpay for a stock.

Try to assess what a stock’s fair value is.

If the current share price is much higher, wait for a pullback before you buy.

Pullbacks do happen and will reward your patience.

You should never rush building a long-term portfolio.

Thorough analysis along with discipline and patience should yield you fantastic results as your winning stock picks reward you.

Until then, here’s to profitable investing. 

Julie Brownlee | The Money Lab

Julie Brownlee
Editorial Contributor
The Money Lab

PS: Don't forget to download your FREE Fundamental Cheat Sheet. In it I detail the 9 must-have ratio's you can use to uncover the best stocks for your portfolio! I'll tell you what they are, how to calculate them, and ultimately how to use them to pinpoint profitable stocks! 

Embed Content Upgrade