Introduction 1
About This Book 2
Icons Used in This Book 2
Beyond the Book 3
Where to Go from Here 3
Part 1: What Fundamental Analysis is and Why You Should Use it5
Chapter 1: Understanding Fundamental Analysis7
Why Bother with Fundamental Analysis? 8
Some of the real values of fundamental analysis 9
Driving home an example 10
Putting fundamental analysis to work 10
Knowing what fundamentals to look for 12
Knowing what you need 13
Knowing the Tools of the Fundamental Analysis Trade 14
Staying focused on the bottom line 14
Sizing up what a company has to its name 14
Burn baby burn: Cash burn 15
Financial ratios: Your friend in making sense of a company 15
Making Fundamental Analysis Work for You 16
Using fundamentals as signals to buy or sell 16
The perils of ignoring the fundamentals 16
Using fundamental analysis as your guide 17
Chapter 2: Getting Up to Speed with Fundamental Analysis 19
What is Fundamental Analysis? 20
Going beyond betting 20
Understanding how fundamental analysis works 22
Who can perform fundamental analysis? 23
Following the money using fundamentals 25
Comparing Fundamental Analysis with Other Ways of Picking Investments 26
How fundamental analysis stacks up against index investing 26
Comparing fundamental analysis with technical analysis 27
Putting Fundamental Analysis to Work for You 28
How difficult is fundamental analysis? Do I need to be math wizard? 29
Is fundamental analysis for you? 29
The risks of fundamental analysis 30
Making Money with Fundamental Analysis 31
Putting a price tag on a stock or bond 31
Being profitable by being a contrarian 32
The Fundamental Analysis Toolbox 33
Introducing the income statement 33
Balance-sheet basics 33
Getting the mojo of cash flows 34
Familiarizing yourself with financial ratios (including the P-E) 35
Chapter 3: Gaining an Upper Hand on Wall Street: Why Fundamental Analysis Gives Investors an Edge37
Better Investing with Fundamentals 38
Picking stocks for fundamental reasons 39
Dooming your portfolio by paying too much 43
Sitting through short-term volatility 44
Relying on the Basic Info the Pros Use 45
What is the Warren Buffett Way? 45
Checking in on Graham and Dodd 47
Figuring Out When to Buy or Sell a Stock 48
Looking beyond the per-share price 49
Seeing how a companys fundamentals and its price may get out of alignment 50
Avoiding overhyped story stocks 51
Pairing buy-and-hold strategies with fundamental analysis 52
Looking to the long term 53
Patience isnt always a virtue 54
Chapter 4: Getting Your Hands on Fundamental Data 55
Getting in Sync with the Fundamental Calendar 56
Which companies must report their financials to the public? 56
Kicking it all off: Earnings season 57
Getting the earnings press release 58
Bracing for the 10-Q 59
Running through the 10-K 61
Flipping through the annual report 62
Theres no proxy like the proxy statement 63
Getting up to Speed with the Basic Accounting and Math 64
Operating activities: Finding smooth operators 65
Investing activities: You have to spend money to make money 65
Financing activities: Getting in tune with high finance 66
Learning a key fundamental math skill: Percentage changes 67
How to Get the Fundamental Data You Need 68
Getting acquainted with the SECs database 68
Step-by-step directions on accessing company fundamentals using EDGAR 69
Pulling fundamental data from websites into spreadsheets 70
Finding stocks dividend histories 71
Getting stock-split information 72
Part 2: How to Perform Fundamental Analysis75
Chapter 5: Analyzing a Companys Profitability Using the Income Statement77
Digging Deep into the Income Statement 78
Cutting through to the key parts 78
Taking in the Top Line: Revenue 80
Breaking down a companys revenue 81
Keeping tabs on a companys growth 82
What are the companys costs? 85
Calculating Profit Margins and Finding Out What They Mean 89
Differences between the types of profit margins 89
Finding out about earnings per share 92
Comparing a Companys Profit to Expectations 93
The importance of investors expectations 94
Comparing actual financial results with expectations 94
Chapter 6: Measuring a Companys Staying Power with the Balance Sheet97
Familiarizing Yourself with the Balance Sheet 98
Separating your assets from your liabilities 98
The most basic equation of business 99
Understanding the Parts of the Balance Sheet 100
Covering your bases with assets 100
Getting in touch with a companys liabilities 102
Taking stock in a companys equity 104
Analyzing the Balance Sheet 106
Sizing up the balance sheet with common-sizing 106
Looking for trends using index-number analysis 108
Appreciating working capital 110
Analyzing here and now: The current ratio 111
The Danger of Dilution 111
How stock can be watered down 112
Knowing how stock options can contribute to dilution 113
Soaking up extra shares with buybacks 113
Chapter 7: Tracking Cash with the Statement of Cash Flow115
Looking at the Cash-Flow Statement as a Fundamental Analyst 116
Getting into the flow with cash flow 117
Breaking the cash-flow statement into its key parts 118
Examining a companys cash flow from operations 119
Considering a companys cash from investments 123
Getting into a companys cash from financing activities 124
How Investors May be Fooled by Earnings, But Not by Cash Flow 126
A quick-and-dirty way to monitor a companys cash flow 127
Understanding the Fundamentals of Free Cash Flow 130
Calculating free cash flow 130
Measuring a companys cash-burn rate 131
Chapter 8: Using Financial Ratios to Pinpoint Investments133
Using Financial Ratios to Find Out Whats Really Going on at a Company 134
Which financial ratios you should know and how to use them 135
Using ratios to grade management 137
Checking up on a companys efficiency 140
Evaluating companies financial condition 142
Getting a handle on a companys valuation 144
Getting Familiar with the Price-to-Earnings Ratio 147
How to calculate the P-E 147
What a P-E tells you about a stock 148
Putting the P-E into Perspective 149
Taking the P-E to the next level: the PEG 149
Evaluating the P-E of the entire market 150
Chapter 9: Mining the Proxy Statement for Investment Clues153
Getting up to Speed with What the Proxy Statement is 154
Uncovering info in the proxy statement 154
Getting your hands on the proxy 155
Expanding Fundamental Analysis Beyond the Numbers 157
Appreciating corporate governance 157
Getting to know the board 158
Stepping through the Proxy 159
Getting to know the board of directors 159
Analyzing the independence of board members 159
Delving into the boards committees 160
Finding potential conflicts between the board and the company 161
Understanding how the board is paid 161
Auditing the auditor 162
Finding out about the other investors in a stock 163
How Much are We Paying You? Understanding Executive Compensation 164
Figuring out how much executives earn 165
Checking out the other perks executives receive 166
Where the real money comes from: Options and restricted stock 168
Checking in on your Fellow Shareholders 168
Finding out who else owns the stock 168
Whats on other investors minds: Shareholder proposals 169
Part 3: Making Money with Fundamental Analysis171
Chapter 10: Looking for Fundamental Reasons to Buy or Sell173
Looking For Buy Signals from the Fundamentals 174
Finding companies that have staying power 175
Looking for a company on the rise 179
Betting on the brains behind the operation 181
Minding the earnings yield 183
Knowing When to Bail out of a Stock 184
Breaking down some top reasons to say adios to a stock 185
Why selling stocks everyone else wants can be profitable 186
What Dividends can Tell You about Buying or Selling a Stock 187
Calculating the dividend yield 188
Knowing if youre going to get the dividend 189
Making sure the company can afford the dividend 190
Using dividends to put a price tag on a company 191
Chapter 11: Finding a Right Price for a Stock Using Discounted Cash Flow195
How to Stop Guessing How Much a Company is Worth 196
How minding intrinsic value can help you 197
Getting up to speed for the discounted cash flow 198
Performing a Discounted Cash Flow Analysis 201
Starting out with free cash flow 202
Getting the companys shares outstanding 202
Estimating the companys intermediate-term growth 203
Going way out: Forecasting long-term growth 204
Measuring the discount rate 204
Putting it all together 207
Making the Discounted Cash Flow Analysis Work for You 211
Websites to help you do a DCF without all the math 211
Knowing the limitations of the DCF analysis 212
Chapter 12: Using the Annual Report (10-K) to See What a Company is Worth213
Familiarizing Yourself with the Annual Report 214
First, a word on the difference between the annual report and the 10-K 215
Getting your hands on the 10-K 216
Dissecting the main sections of the annual report 217
How to Tackle a Massive Annual Report 222
Starting from the bottom up: The footnotes 222
See what management has to say for itself 226
Being aware of legal skirmishes 228
Paying close attention to amended 10-Ks 228
Examining What the Auditors Opinion Means for Investors 229
Paying attention to tiffs between a company and its auditors 230
Understanding the importance of financial controls 230
Reading the audit opinion 230
Chapter 13: Analyzing a Companys Public Comments and Statements233
Using Analyst Conference Calls as a Source of Fundamental Information 234
Understanding the purpose of analyst conference calls 235
The dimming guiding light of guidance 235
Unique things to look for in analyst conference calls 236
How to access the analyst conference calls 237
Getting in Tune with Fundamental Information from the Media 239
Bolstering your fundamental analysis with media reports 240
What fundamental analysts look for in the media 241
When to be skeptical of executives claims in the media 241
Knowing When to Pay Attention at Shareholders Meetings 242
What to expect during a companys annual meeting 243
Putting the fun in fundamental analysis 244
Chapter 14: Gleaning from the Fundamental Analysis Done by Others 245
Reading Analysts Reports for Fundamental Analysis Clues 246
Why reading analysts reports can be worth your time 246
Understanding the types of firms that put out stock research 247
Keying into the main types of analyst research 250
How to read between the lines of an analyst report 250
Getting your hands on analyst reports 252
Interpreting Credit-Rating Agencies Reports For Fundamental Analysis 253
The role of reports issued by credit-rating agencies 253
Getting your hands on the credit rating 256
Knowing when a companys credit rating is suspect 257
Finding Fundamental Data about Companies Using Social Investing 259
The origins of social investing 259
Why it might be worth paying attention to nonprofessionals 260
How to plug into social networking 261
Following the moves of big-time investors 262
Chapter 15: Performing Top Down Fundamental Analysis265
Broadening Out Fundamental Analysis to Include Monitoring the Economy 266
How the economy has an overriding effect on a company 266
Ways the economy can alter your fundamental analysis 268
How interest rates can alter what companies are worth 269
Analyzing the Key Measures of the Economys Health 271
Being aware of the business cycle 271
Using government statistics to track the economys movements 272
Getting a Jump on the Future Using Leading Economic Indicators 273
Paying attention to the Conference Board Leading Economic Index 274
Using the stock market as your economic early warning system 275
Part 4: Getting Advanced with Fundamental Analysis277
Chapter 16: Digging into an Industrys Fundamentals279
Realizing How a Companys Industry can Influence its Value 280
Whats in an industry? 281
Following the ups and downs of industries 283
How to Track How Sectors are Doing 284
Keeping tabs on a sectors fundamentals 285
Tracking the stock performances of sectors 286
Using exchange-traded funds to monitor sectors and industries 287
Adding Industry Analysis to your Fundamental Approach 288
Sizing up a companys financials relative to its industrys 288
Find out who a companys competitors are 290
Considering industry-specific data 290
Taking stock of raw material costs 291
Its mine! Paying attention to market share 292
Chapter 17: Pinpointing Trends using Fundamental Analysis295
Understanding why to Consider Trends 296
When trends can be very telling about a companys future 296
Attempting to forecast the future using trends 298
Attempting to forecast the future using index-number analysis 300
Applying moving averages to fundamental analysis 301
Finding Trends in Insider Trading Information 303
When a CEO is bullish, should you be, too? 303
Paying attention to when a company buys its own stock 304
Watching when the insiders are selling 305
How to track insider selling 306
Designing Screens to Pinpoint Companies 307
Examples of what screening can tell you 307
Step-by-step instructions on building a sample screen 308
Chapter 18: Avoiding Investment Blow-Ups with Fundamental Analysis311
Uncovering the Dangers of Not Using Fundamental Analysis 312
Why investing in individual companies is risky business 312
Ignore the fundamentals at your own risk 314
Why digging out of a hole is so difficult 314
Avoiding bubbles and manias 316
Finding and Avoiding Financial Red Flags 320
A real-life pattern for suit-worthy shenanigans 320
The rationale behind shenanigans 321
Red flags that signal shenanigans 322
Chapter 19: Marrying Fundamental Analysis with Technical Analysis325
Understanding Technical Analysis 326
Reading the stock price charts 327
What technical analysts are looking for in the charts 328
How technical analysis differs from fundamental analysis 329
Blending Fundamental and Technical Analysis 330
Using stock prices as your early-warning system 331
Looking up historical prices 331
The Primary Tools used by Technical Analysts 332
Getting into the groove with moving averages 332
Keeping an eye on trading volume 333
The ABCs of Beta 334
The long and short of short interest 335
Keeping a Close Eye on Options 336
Understanding the types of options 336
Paying attention to put and call price levels 337
Watching the put-to-call ratio 338
Using the markets fear gauge: The Vix 338
Applying Technical Analysis Techniques to Fundamental Analysis 339
Giving fundamental data the technical analysis treatment 340
Following the momentum of fundamentals 341
Part 5: The Part of Tens345
Chapter 20: Ten Things to Look at When Analyzing a Company 347
Measuring How Much of a Companys Earnings Are Real 348
Considering How much Cash the Company Has 348
Making Sure You Dont Overpay 349
Evaluating the Management Team and Board Members 349
Examining the Companys Track Record of Paying Dividends 350
Comparing the Companys Promises with What it Delivers 351
Keeping a Close Eye on Industry Changes 351
Understanding Saturation: Knowing When a Company Gets Too Big 352
Avoiding Blinders: Watching the Competition 352
Watching Out When a Company Gets Overly Confident 353
Chapter 21: Ten Things Fundamental Analysis Cannot Do355
Ensure you Buy Stocks at the Right Time 356
Guarantee Youll Make Money 356
Save you Time When Picking Stocks 357
Reduce Your Investing Costs 357
Protect You from Every Fraud 359
Easily Diversify Your Risk Over Many Investments 360
Predict the Future 360
Make You the Next Warren Buffett 361
Protect You from Your Own Biases 361
Overcome the Danger of Thinking Youre Always Right 362
How to measure your portfolios return 362
How to measure your portfolios risk 363
Sizing up your portfolios risk and return 364
Index 365
