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CATEGORY Fundamental analysis

How to Succeed with just Fundamentals



May 22, 2017

A key to doing well with fundamental analysis is just paying attention to what others are ignoring. 

For example back in 1988, Buffett bought more than a billion dollars worth of Coke (KO) because it wasn’t priced correctly. Buffett saw consistent performance and good long-term prospects based on the nuts and bolts of Coke.

He also saw 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 

Also, fundamentally, we want to find opportunities that others are missing. One way is to look at the PEG ratio of the price/earnings growth ratio. Look at Visteon (VC) for example. It’s technically strong.

But it’s also seen as fundamentally overvalued with a P/E ratio of 28.5, which is well above industry average of 12.1. However, in recent weeks, it’s PEG ratio was as low as 0.6, telling us it was trading at 60% of future growth in an explosive auto sector where it supplies electronics.

It’s been argued that it looks good as the industry begins to switch from electric cars.

A second way to spot opportunity is by buying and holding down and out stocks that have economic moat, a good chance at survival, and good news, like Ford, which has been beaten silly over the years.

In May 2017, the company announced a new CEO, which sent the stock up slightly. Such a change can impact the bottom line over time. The goal is to buy big names that won’t go out of business when no one else will touch it.

A third way is to find opportunity is again to buy when no one is looking. Look at EnviroStar (WVI) for example – a stock that used to trade at less than $2 when it was ignored.

Sure, it’s one of the most boring companies in the world, offering replacement parts and accessories for washers and dryers. But there was opportunity as others wrote off the stock. For one, fundamentals became explosive. Net income for example jumped 713% in early 2013, but even that was ignored.

EVI is now trading just above $20. 

Look where others won't even dare, and you may just find opportunity.

 


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