10: The Essential Rules for Beating the Market

Appendix B. Scoring the Fundamentals

When it comes to deciding which stocks to buy, you have learned that 50 percent of your decision must be based on the stock's fundamentals. In Rule 1, you learned that there are a few fundamentals that matter the most when selecting stocks. These are called Demand Fundamentals, and are listed below:

• Quarter-over-quarter revenue growth rate

• Year-over-year earnings growth rate

• Quarter-over-quarter earnings growth rate

• Five-year average revenue growth rate

• Five-year average earnings growth rate

• Return on equity

• Dividend yield

Investors tend to have a significant reaction to changes in these fundamentals. The better the numbers, the more investors will drive up demand for shares and, consequently, the higher the price for shares becomes. Therefore, when selecting stocks to buy, the stronger these Demand Fundamentals, the better. Remember, your goal is to own stocks that have the highest likelihood of increasing share price.

In Rule 2, you learned of an additional key fundamental that is based on relative value, where you compare a stock's PE to its peer group or industry.

Certainly, it is a straightforward process to compare all stocks in your universe by these Demand Fundamentals. All you have to do is calculate the rates of growth (or find one of the many free services online that calculate these rates for you) for each stock and compare the results of one stock to another.

The task of finding these Demand Fundamentals is not hard, but it does become a bit ...