Fundamental analysis for dummies

Fundamental Analysis For Dummiesđ, 2nd Edition Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com Copyright â 2016 by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Trademarks: Wiley, For Dummies, the Dummies Man logo, Dummies.com, Making Everything Easier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc., and may not be used without written permission All other trademarks are the property of their respective owners John Wiley & Sons, Inc., is not associated with any product or vendor mentioned in this book LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: WHILE THE PUBLISHER AND AUTHOR HAVE USED THEIR BEST EFFORTS IN PREPARING THIS BOOK, THEY MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS BOOK AND SPECIFICALLY DISCLAIM ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES REPRESENTATIVES OR WRITTEN SALES MATERIALS THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR YOUR SITUATION YOU SHOULD CONSULT WITH A PROFESSIONAL WHERE APPROPRIATE NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM For general information on our other products and services, please contact our Customer Care Department within the U.S at 877-762-2974, outside the U.S at 317-572-3993, or fax 317-572-4002 For technical support, please visit www.wiley.com/techsupport Wiley publishes in a variety of print and electronic formats and by print-on- demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Control Number: 2016934821 ISBN 978-1-119-26359-3 (pbk); ISBN 978-1-119-26360-9 (ePub); ISBN 978-1-119-26361-6 (ePDF) Fundamental Analysis For Dummies® To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Financial Analysis For Dummies Cheat Sheet” in the Search box Table of Contents Cover Introduction About This Book Icons Used in This Book Beyond the Book Where to Go from Here Part 1: What Fundamental Analysis Is and Why You Should Use It Chapter 1: Understanding Fundamental Analysis Why Bother with Fundamental Analysis? Knowing the Tools of the Fundamental Analysis Trade Making Fundamental Analysis Work For You Chapter 2: Getting Up to Speed with Fundamental Analysis What Is Fundamental Analysis? Comparing Fundamental Analysis with Other Ways of Picking Investments Putting Fundamental Analysis to Work For You Making Money with Fundamental Analysis The Fundamental Analysis Toolbox Chapter 3: Gaining an Upper Hand on Wall Street: Why Fundamental Analysis Gives Investors an Edge Better Investing with Fundamentals Relying on the Basic Info the Pros Use Figuring Out When to Buy or Sell a Stock Chapter 4: Getting Your Hands on Fundamental Data Getting In Sync with the Fundamental Calendar Getting up to Speed with the Basic Accounting and Math How to Get the Fundamental Data You Need Part 2: How to Perform Fundamental Analysis Chapter 5: Analyzing a Company’s Profitability Using the Income Statement Digging Deep Into the Income Statement Taking in the Top Line: Revenue Calculating Profit Margins and Finding Out What They Mean Comparing a Company’s Profit to Expectations Chapter 6: Measuring a Company’s Staying Power with the Balance Sheet Familiarizing Yourself With the Balance Sheet Understanding the Parts of the Balance Sheet Analyzing the Balance Sheet The Danger of Dilution Chapter 7: Tracking Cash with the Statement of Cash Flow Looking at the Cash-Flow Statement As a Fundamental Analyst How Investors May Be Fooled by Earnings, But Not by Cash Flow Understanding the Fundamentals of Free Cash Flow Chapter 8: Using Financial Ratios to Pinpoint Investments Using Financial Ratios to Find Out What’s Really Going on at a Company Getting Familiar with the Price-to-Earnings Ratio Putting the P-E into Perspective Chapter 9: Mining the Proxy Statement for Investment Clues Getting up to Speed with What the Proxy Statement Is Expanding Fundamental Analysis Beyond the Numbers Stepping Through the Proxy How Much Are We Paying You? Understanding Executive Compensation Checking In on Your Fellow Shareholders Part 3: Making Money with Fundamental Analysis Chapter 10: Looking for Fundamental Reasons to Buy or Sell Looking For Buy Signals from the Fundamentals Knowing When to Bail out of a Stock What Dividends Can Tell You about Buying or Selling a Stock Chapter 11: Finding a Right Price for a Stock Using Discounted Cash Flow How to Stop Guessing How Much a Company is Worth Performing a Discounted Cash Flow Analysis Making the Discounted Cash Flow Analysis Work for You Chapter 12: Using the Annual Report (10-K) to See What a Company Is Worth Familiarizing Yourself with the Annual Report How to Tackle a Massive Annual Report Examining What the Auditor’s Opinion Means For Investors Chapter 13: Analyzing a Company’s Public Comments and Statements Using Analyst Conference Calls as a Source of Fundamental Information Getting In Tune with Fundamental Information from the Media Knowing When to Pay Attention at Shareholders’ Meetings Chapter 14: Gleaning from the Fundamental Analysis Done by Others Reading Analysts’ Reports for Fundamental Analysis Clues Interpreting Credit-Rating Agencies’ Reports For Fundamental Analysis Finding Fundamental Data about Companies Using Social Investing Chapter 15: Performing “Top Down” Fundamental Analysis Broadening Out Fundamental Analysis to Include Monitoring the Economy Analyzing the Key Measures of the Economy’s Health Getting a Jump on the Future Using Leading Economic Indicators Part 4: Getting Advanced with Fundamental Analysis Chapter 16: Digging into an Industry’s Fundamentals Realizing How a Company’s Industry Can Influence Its Value How to Track How Sectors Are Doing Adding Industry Analysis to Your Fundamental Approach Chapter 17: Pinpointing Trends Using Fundamental Analysis Understanding Why to Consider Trends Finding Trends in Insider Trading Information Designing Screens to Pinpoint Companies Chapter 18: Avoiding Investment Blow-Ups with Fundamental Analysis Uncovering the Dangers of Not Using Fundamental Analysis Finding and Avoiding Financial Red Flags Chapter 19: Marrying Fundamental Analysis with Technical Analysis December 2016 $11,000 Using Table 21-1, you would measure your portfolio’s return this way: ($11,000 – $10,000) / $10,000 = 0.10 Multiply by 100 to convert the answer into a percentage, or 10% That is your annual return Be sure to compare the return of your portfolio to that of the Standard & Poor’s 500 or another stock market index to find out if you’re beating, or getting beaten by, the market How to measure your portfolio’s risk Putting a number on your portfolio’s risk is a little trickier than measuring your return You’ll need to figure out how volatile your returns are using a statistical measure called standard deviation To calculate your portfolio’s standard deviation, you will first need to tabulate the percentage changes for each period You can do this analysis based on any period of time, but since Table 21-1 is quarterly, you can practice with that You just use the formula above and calculate the returns for each quarter When you’re done, you’ll see a table that looks like what you see in Table 21-2 Table 21-2 Sample Portfolio Of Returns Quarter ended Return March 2009 0.5% June 2009 4.5% September 2009 0.01% December 2009 4.8% Lastly, you’ll need to calculate the standard deviation If you want to understand the gory details of standard deviation and how to calculate it by hand, check out Statistics for Dummies, 2nd Edition (Wiley) But I’ll give you a quick pointer on how to calculate standard deviation using tools you already have after reading this book Enter the row and columns from your quarterly returns, like the ones in Table 21-2, into Microsoft Excel You can then use the =stdev function and let Excel do the number crunching for you For more help on ways to use your computer to calculate standard deviation, especially when returns are negative, that’s also covered in Investing Online for Dummies, 2nd Edition (Wiley, 2016) If you have an HP 12C financial calculator, you can enter each return followed by the Sigma + key When you’re done entering all the returns, press the g key and the s key to see your portfolio’s quarterly standard deviation The answer you get is 2.55 percentage points You’re almost done You must now convert the quarterly standard deviation into an annualized number You do that by multiplying the period’s standard deviation by the square root of the number of periods in a year Yikes, I know But in this case, because you are measuring quarterly standard deviation, there are four quarters in a year That means you take the square root of 4, which is 2 So to convert your quarterly standard deviation to an annualized figure, just multiply the 2.55 standard deviation by 2 Sizing up your portfolio’s risk and return Just knowing your portfolio’s return and risk doesn’t tell you much It’s important to compare those data with a benchmark, or a set of investments that you want to size yourself up against The IFA Risk and Return Calculator (www.ifa.com/calculator) lets you see the returns and standard deviations of several measures of stocks to see how you’re doing Be careful of drawing too much from just one year Don’t assume that if you had one good year your luck will continue About the Author Matt Krantz is a nationally known financial journalist who specializes in investing topics He has been a writer for USA Today since 1999, where he covers financial markets and Wall Street, concentrating on developments affecting individual investors and their portfolios His stories routinely signal trends that investors can profit from and sound warnings about potential scams and issues investors should be aware of Krantz has written or cowritten three books in addition to this one, including Investing Online For Dummies, Investment Banking For Dummies, and Mint.com For Dummies, all published by Wiley In addition to covering markets for the print edition of USA Today, Matt writes an online investing column called “Ask Matt,” which appears every trading day at www.usatoday.com He answers questions posed by the website’s audience in an easy-to-understand manner Readers often tell Matt he’s the only one who has been able to finally solve investing questions they’ve sought answers to for years Matt has been investing since the 1980s and has studied dozens of investment techniques while forming his own And as a financial journalist, Matt has interviewed some of the most famous and infamous investment minds in modern history Before joining USA Today, Matt worked as a business and technology reporter for Investor’s Business Daily and was a consultant with Ernst & Young prior to that Matt earned a bachelor’s degree in business administration at Miami University in Oxford, Ohio He has spoken for investing groups, including at the national convention of National Association of Investors Corporation, and has appeared on financial TV Matt is based at USA Today’s Los Angeles bureau When he’s not writing, he’s spending time with his wife and young daughter, running, playing tennis, mountain biking, or playing Xbox games Dedication This book is dedicated to my wife, Nancy, who has helped me do my best, my parents for urging me to do my best, my grandparents for inspiring me to do my best, and my daughter, Leilani, for giving me a reason to do my best Author’s Acknowledgments Taking on a project of the size and scope of this book would have been overwhelming without the help of key people along the way My wife, Nancy, is always there ready with an encouraging pat or a suggestion for the perfect word that is eluding me Steve Minihan, a financial advisor and professor for UCLA Extension, has provided invaluable instruction and analysis skills Fane Lozman shared his options expertise David Trainer of New Constructs provided his expertise Thanks to S&P Capital IQ and Morningstar for providing data for the book The team at Wiley has also been very supportive, including Stacy Kennedy, acquisitions editor, Corbin Collins, editor, and Paul Mladjenovic, technical editor And again, a big thanks to Matt Wagner, my literary agent, for letting me know about this opportunity Finally, I want to thank my parents for giving me the tools and determination to pursue my interests in writing and investing My mom and dad taught all their kids that they could achieve their goals if they always did their best and never stopped trying to get even better My grandparents are models of the long-term success I continue to strive for Publisher’s Acknowledgments Acquisitions Editor: Stacy Kennedy Editor: Corbin Collins Production Editor: Siddique Shaik Cover Image: © xalex/Shutterstock.com Take Dummies with you everywhere you go! Go to our Website Like us on Facebook Follow us on Twitter Watch us on YouTube Join us on LinkedIn Pin us on Pinterest Circle us on google+ Subscribe to our newsletter Create your own Dummies book cover Shop Online WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... ISBN 978-1-119-26359-3 (pbk); ISBN 978-1-119-26360-9 (ePub); ISBN 978-1-119-26361-6 (ePDF) Fundamental Analysis For Dummies? ? To view this book's Cheat Sheet, simply go to www .dummies. com and search for “Financial Analysis For Dummies Cheat Sheet” in the Search... Knowing the Tools of the Fundamental Analysis Trade Making Fundamental Analysis Work For You Chapter 2: Getting Up to Speed with Fundamental Analysis What Is Fundamental Analysis? Comparing Fundamental Analysis with Other Ways of Picking... Putting Fundamental Analysis to Work For You Making Money with Fundamental Analysis The Fundamental Analysis Toolbox Chapter 3: Gaining an Upper Hand on Wall Street: Why Fundamental Analysis Gives Investors an