The Philippine Stock Exchange (PSE) lists more than 300 stocks representing 250+ firms in the country. With so many options, new investors may find it difficult to know which are good stocks.
Instead of using your intuition, it’s best to use a process that will help you determine whether the stock you picked is a good investment choice. This process is fundamental analysis.
What is Fundamental Analysis?
Fundamental analysis is the method of evaluating a business at its most basic financial level. This analysis looks at key ratios to assess a company’s value. It can also help you determine the company’s financial health.
Picking a stock using fundamental analysis is better than following your instincts, choosing a random stock, or following the advice of new stock traders. With this type of analysis, you base your choice on facts rather than opinions.
Value or Growth?
If you’re planning to choose stocks using fundamental analysis, you need to find out whether you’re using this method for value or growth.
Value-oriented investors look to buy stocks that are selling below their intrinsic value. You can find this value by using certain ratios:
Price-to-Earnings (P/E) Ratio – It looks at the relationship between the company’s current sales price and its per-share earnings. This ratio is the most popular stock analysis metric. You can obtain a stock’s P/E ratio by dividing the company’s current share price with its earnings per share (EPS). You can get a company’s EPS by dividing a company’s profit by its number of outstanding common shares.
Dividend Yield – This ratio looks at the relationship between a stock’s yearly dividends and its share price.
Price-to-Book (P/B) Ratio – Also known as the price-to-equity ratio, P/B ratio compares the book value of a stock to its market value. You can calculate for this ratio by dividing the most recent closing price of a stock by the company’s last quarter book value per share.
But a smart investor should remember: these ratios are helpful tools, and no single ratio is a magic bullet. They can’t provide you with a buy, hold, or sell recommendations by themselves. You need to weigh their value alongside other ratios and considerations.
For those who consider themselves as growth investors, they should look for companies with high or accelerating levels of sustained growth. They should avoid companies with declining growth rates. Jollibee Foods Corporation (JFC), for instance, registered double-digit growth (18 percent) in the first quarter of 2018 despite the massive correction in the stock market. As the PSE index fell, the share price of JFC continued to increase and became a haven for investors looking to cut down their exposure to losses.
How Fundamental Investors Analyze Stocks
If you’re serious about pursuing fundamental analysis, you’ll need to gather the following information:
Financial Statements – You need to learn how to read financial statements. Make sure you read two of the most recent quarterly reports and one recent annual report.
Historical Data – Besides reviewing recent financial statements, you should look for websites that offer historical metrics for individual stocks.
Press Releases and Business News – Search financial and news websites and check out all the published news items, press releases, and commentary published since the last earnings report.
Analysts Reports – Review the recent reports made by established fundamental analysts in the country.
It’s not impossible for new investors to choose the best stocks in the PSE. Hone your analysis skills by benchmarking stocks, analyzing the statements and reports, and developing opinions about these stocks.