Investment strategies aren’t one-size-fits-all – but it can still be helpful to hear other people’s approaches.
For years, fundamental analysis has been central to how I personally have chosen to invest. This is in part influenced by my experience as a chartered financial analyst. But I know I’m not alone – our most popular webinar yet at IEX Cloud has been our introduction to fundamental analysis!
That’s why I put together this introduction. If you’re totally new to the world of fundamental analysis, this is one place you can start. Or, perhaps you’re simply interested in seeing how someone else chooses to approach investing.
In this blog post, I'll take you through:
- The basic concepts of fundamental analysis and four things to think about when getting started,
- How I like to use fundamentals in my own investments,
- An overview of how to access fundamentals data to get started yourself.
If you’re looking for more resources, I’d also recommend clicking the button below and checking out:
- Two free, pre-built Excel templates that I created for fundamental analysis, downloadable from our website. They transform raw fundamentals data into handy charts, ratios, and metrics.
- A full recorded webinar, where I take you through fundamental analysis in Excel step-by-step.
Get Excel templates and full tutorial recording
Disclaimer: Of course, it’s important to note that this blog post does not constitute as investment advice, or any sort of official IEX Cloud stance on fundamental analysis. These are simply my personal observations, and a bit of background about how I’ve leveraged fundamentals data – which happily, we have a great selection of on the platform!
Now, without further ado, four tips for getting started with fundamental analysis.
1) Differentiate fundamental analysis from technical analysis.
The world of investing is broadly split into two camps – fundamental analysis and technical analysis.
Fundamental analysis evaluates stocks by attempting to measure their intrinsic value. In this approach, you study everything from the overall economy and industry conditions to the financial strength and management of individual companies. A key element is clear analysis of the financial statements of the company – its earnings, expenses, assets and liabilities, cashflows and the ability for those cashflows to pay a dividend to shareholders.
Technical analysis doesn't focus on the fundamentals and instead looks for statistical trends in the way a security or market is trading. The core assumption is that all known fundamentals are factored into price, thus there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value. Instead, they use stock charts to identify patterns and trends that suggest what a stock will do in the future.
2) Learn about growth stocks and value stocks.
Fundamental analysis is broader than one specific metric or ratio and encapsulates a range of approaches. This blog post only talks through the tip of the iceberg. Investopedia provides a fairly detailed rundown here. At a high level, many factors – or strategies for finding securities with high returns – are fundamentally based. Two common examples are growth and value stocks.
Growth stocks are mostly driven by the promise of future top line or earnings growth – often benefitting from an intrinsic shift or new market opportunity.
Growth stocks tend to be valued more highly due to the promise of growing returns. They also offer a greater possibility of disappointment, since if growth falls short of expectations, the stock by definition has been overvalued. Growth stocks often have:
- A high price-to-enterprise value ratio (find enterprise value on our Advanced Stats endpoint), or
- A high price-to-earnings ratios, or P/E ratio (you can find P/E ratio on our Key Stats endpoint).
Value stocks are typically companies with solid fundamentals that also are priced below where they perhaps should be, based on some measure of intrinsic valuation. That measure of intrinsic valuation might look like a lower price-to-sales or price-to-earnings ratios, or a lower price to book value ratio. Value stocks tend to be in more established industries, and while their topline growth may have slowed, they are often strong creators of free cashflow and hence can have quite high dividend yields.
But what do solid fundamentals look like? That’s again when I would point you to our more comprehensive webinar recording.
The big picture is: the key to fundamental investing is weighing whether stocks are over-valued or under-valued given their intrinsic value. Intrinsic value is normally driven by how much growth is already built into the share price.
3) Remember that fundamental analysis is all about comparison.
Another important point is that fundamental analysis generally needs to be done on a relative basis. For instance, you might look at a company relative to others with similar growth prospects, relative to companies that compete in the same sector or industry, or even relative to the market as a whole.
You also generally want to look at valuation through time – is the company becoming more and more highly valued compared to the market or its peers, and is that really reflected in the relative performance of the underlying business?
And to be honest – this is rarely an exact science, as we’ve seen during the pandemic how industries fluctuate due to larger, unpredictable factors.
4) Keep in mind that fundamentals can be just one part of your strategy.
The reality is that stocks often trade on a combination of factors, and there’s more to look at than any single “silver bullet” ratio, metric, or approach. Charts are an obvious place to start in seeing how a stock trades, for which technical analysis can be helpful. But investors that just use technical analysis risk the fundamentals of a stock catching up with it.
For instance, one technical factor I do look at is momentum, which is not based on the fundamentals of a company but rather is measured with technical indicators. When stocks have high momentum, it’s risky to bet against them, although again I personally believe that fundamentals prevail in the end (and predicting the timing of that can be very difficult).
You can also go above and beyond with a wide breadth of other datasets. For instance you might:
- Leverage corporate events to try to find clues about how a stock might perform after an upcoming earnings announcement, or
- Track sentiment in the news about a company to get a sense of how it’s performing, or
- Examine stock price correlations to minimize risk and better diversify your portfolio.
With over 150 datasets on IEX Cloud alone, the possibilities are virtually limitless!
My personal approach
I look for firms with good growth prospects that are trading at a reasonable valuation in relation to that growth. I tend to avoid firms with very high momentum on the back of unsustainable growth expectations – but that can mean I miss out on some opportunities like Tesla and Amazon!
I should also say that I fundamentally believe in diversification. Mutual funds and ETFs are a great way to do this – but as a non-practicing investment professional, I still like to do deep dives on the fundamentals before I invest.
You can also combine the two concepts. For instance, if you want to invest in a basket of growth or value stocks, or momentum stocks – you can do that with an ETF. It’s just less fun for those that enjoy the nitty-gritty analysis!
You can always go beyond the standard basic datasets to help with the process. Kavout, one of our data partners, is a great example. It ranks stocks by various factors like growth and momentum. This data is available to you through IEX Cloud as a Premium Dataset and can be a useful addition to your mosaic.
Again, this blog post isn't investment advice – I’m providing my personal approach simply as a case study of how fundamental analysis can be powerful, especially when paired with a lot of thoughtful usage of different datasets.
Last but not least: How do I get fundamentals data?
If this all sounds like a lot of work – it doesn’t need to be. As well as providing a lot of raw data, we also have API endpoints that deliver pre-calculated metrics ready out-of-the-box - such as a company’s trailing or forward P/E ratios.
The most important endpoints to note:
- Advanced Fundamentals endpoint: For comprehensive fundamentals data and full analysis. Available with all paid IEX Cloud plans.
- Balance Sheet, Cash Flow, Financials and Income Statement endpoints: Simplified fundamentals data for more basic usage. Available with free plans.
- The New Constructs Report (Premium Data): Get insights into the profitability and valuation of public and private companies through New Constructs’ daily research reports. The report includes risk/reward ratings to help empower clients to make more informed investing decisions based on true, not reported or distorted, earnings. Learn more about Premium Data here – this endpoint is available with paid plans as an add-on.
If you’re new to IEX Cloud:
- Create an account with us – and to get the full breadth of data, sign up for either an Individual or Business plan,
- Follow the instructions in our Help Center for initial set up,
- Start pulling data in minutes from the endpoints above.
I hope this overview was helpful! Show us what you build on Twitter @iexcloud, and if you have any trouble getting started with our data, send us an email at firstname.lastname@example.org.
IEX Cloud Services LLC makes no promises or guarantees herein regarding results from particular products and services, and neither the information, nor any opinion expressed here, constitutes a solicitation or offer to buy or sell any securities or provide any investment advice or service.
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