Investments: Analysis and Management, 12th Edition

chapter 15

Company Analysis

The last step in your bid to understand how investors go about doing fundamental security analysis is to consider individual companies. You knew from the outset of your quest to gain some investing knowledge that you will want to own some individual stocks regardless of whether you also plan to hold index funds and ETFs. After all, you have heard several stories about individuals who owned stocks that doubled, tripled, or did even better. And what little you have heard when investors or the media discuss stocks has often involved earnings, so you figure this must be important. Finally, you wish to be able to understand what all the fuss is about when it comes to earnings guidance, earnings surprises, and earnings disappointments. While this is a little more challenging, you can easily become comfortable with these concepts.

As we learned in Chapter 11, most investors following an active approach to investing are stock selectors. Everyone wants to hold stocks that will perform well over time, and many investors are searching for the next Apple, Google, Amazon.

Once economy/market analysis has indicated a favorable time to invest in common stocks and sector/industry analysis has been performed to find those sectors and industries that are expected to perform well in the future, it remains for the investor to choose promising companies within those sectors and industries. The last step in top-down fundamental analysis, therefore, is to analyze individual ...