Fundamental Analysis

Fundamental analysis is a method of determining a stock's real or "fair market" value. Fundamental analysts search for stocks that are currently trading at prices that are higher or lower than their real value. If the fair market value is higher than the market price, the stock is deemed to be undervalued and a buy recommendation is given. In case a stock proce pattern meets the non-negotiable technical criteria as outlined in the 'Trend Analysis' section, we are looking at the following fundamental data before we consider to put a stock on our watchlist:

  • Increase of the earnings per share (EPS) over the last 3 quarters by at least 20% per quarter or more.
  • In case this exponential increase is present, look for increasing sales and profit margins increases over the last few quarters to make sure that the earnings growth is coming from a healthy and sustainable business expansion rather than one-time effects like cost-cutting programs, plant shutdowns or other non-recurring effects.
  • Earnings reports should result in positive surprises versus the earnings estimates over the last few quarters.

Why are exponentially increasing earnings per share and positive earnings susprises so important?
Stock prices are being moved up and down by the big money coming from institutional investors. Both increasing EPS performance as well as positive earnings suprises attract institutional buyers and they jump on board (or at least put the stock on their radar screens) which moves the stock prices up. The resulting price action attracts momentum traders propelling the stock price even higher.