Finding Alphas, 2nd Edition

20Fundamental Analysis and Alpha Research

By Xinye Tang and and Kailin Qi

Along with techniques such as pairs trading, momentum investing, event-driven investing, and news sentiment analysis, fundamental analysis is an important tool used in designing quantitative alphas. By examining relevant economic and financial factors, fundamental analysts attempt to reveal a security's value and determine whether it is undervalued or overvalued. A potentially profitable portfolio can then be constructed by going long the relatively undervalued securities and/or going short the overvalued ones. This chapter introduces the key ideas and data sources used in fundamental analysis, as well as the applications of fundamental analysis in quantitative alpha research.

Fundamental analysis can be applied to a range of financial securities. In the context of stocks, fundamental analysis is defined as techniques to determine a company's intrinsic value by analyzing underlying factors that affect its business and its prospects. Fundamental analysts seek to answer such questions as: is the company's revenue steadily growing? What is the company's ability to pay its debt? Does the company have good profitability as well as high earnings quality? Does the company have enough liquid assets compared with liabilities?

On a broader scale, fundamental analysis refers to the analysis of the economic well-being of a financial entity, not just its price movements. Fundamental analysis can be applied not only ...