Question about fundamental analysis

[johnnyhuynh21]

Hi!

I am extremely new to trading, and have recently entered a trade based on some very simple fundamental analysis. I was looking for stocks that were relatively cheap <50c and found that many of them were making losses. I kept going through loads of companies until i finally found one making profit, and increasing profit from previous years. It looked healthy with its debt levels, its p/e ratio was low in comparison to the sector, roe was great. I decided to buy it (SDI) and in two weeks it went up 30%.

So now, with this being my first stock that has made such a huge increase, i dont know whether i should hold or sell. I originally wanted to invest in this stock for the long term as it looked quite healthy but 30% is quite an increase and i was just wondering how others gauge in when a stock goes from under-valued or over-valued. Its p/e ratio is higher than the industry average now. Also note that in past 52 weeks it has increased 200-300%!.

Also, with fundamental analysis, is it wise to keep track of all announcements made by the company, and what kind of news can affect the stock ? where can i obtain this news ? Right now im just basing all my knowledge on its financial reports which is more backward looking, rather than whats happening at this point in time.

I realise each individual company is different and there probably isnt a "right" answer to my question, but right now im quite new and the money isnt as important as the learning part of it. So i just want to know, at this point, what signs should steer me to selling at a 30% profit, or what signs would steer me into holding, hoping for a further increase ?

thanks!

 

[prawn_86]

and have recently entered a trade based on some very simple fundamental analysis. I was looking for stocks that were relatively cheap <50c

The stock price has nothing to do with the fundamentals of a company.

Company A has 1m shares @ $1 = 1m
Company B has 2m shares @ 50c = 1m

There are a heap of resources int he Beginners Lounge, i suggest you read through them thoroughly

Cheers

 

[McLovin]

Hi johnny

Couple of quick questions/observations.

1. The share price has nothing to do with how expensive/cheap the shares are.

2. How did you calculate ROE? You said it's great but from the last AR it's <5%.

3. May I assume you used debt/equity to determine that it had healthy debt levels? If you calculate interest coverage it's actually quite low ie bad (EBIT/finance costs). A broad generalisation but if you have two companies with the same dollar amount of equity, the one with the higher ROE will be able to support a higher level of debt than the one with the lower ROE. I prefer to look at a company's ability to service its debt rather than a ratio between its debt and its equity.

4. This sector has a couple of behemoths (COH, CSL, RMD) which are global leaders in their field before you start making sector comparisons make sure you're comparing like for like.

Finally, the EV/EBIT ratio is almost 19x. To mean that means there is a lot of blue sky, how likely do you think that will occur?

Would I sell? Absolutely, but I would have never bought in the first place.

 

[Ves]

Would I sell? Absolutely, but I would have never bought in the first place.

I looked at SDI in the late 10s, early 20s after Camden mentioned it a few times. I was a bit lazy and didn't look deep enough. For a company with lots of supposed currency headwinds, they sure are growing rapidly at the moment!

 

[CanOz]

From a price perspective...In case its of interest...

You could use a mental stop loss of .29 - if it drops to that then sell.

It has some weak hands to get through...People that were locked in at .46 and .39 - they may wish to sell once the price gets back there again. If it can get up through that supply then .59 is the next hurdle.

Hope that helps...

See attached chart...SDI Weekly (its a bit thin for daily)

Cheers,


CanOz

 

[McLovin]

I looked at SDI in the late 10s, early 20s after Camden mentioned it a few times. I was a bit lazy and didn't look deep enough. For a company with lots of supposed currency headwinds, they sure are growing rapidly at the moment!

I've never heard of it, tbh. And my analysis up thread was based on a five minute look at the accounts. If Camden was looking at it then it must have some merit.

 

[tinhat]

Not to do with fundamental analysis, but one thing you want to keep in mind with small caps is that they are often thinly traded. Someone is buying at the moment - they have been soaking up everything that has come onto the market and has been happy to bid the price up. Never the less the average volume of shares traded over the past month is only 42,000 per day or $49,000. So if you only have a few bucks in the stock that shouldn't be a problem, but if you do want to execute a trailing stop-loss you may not be able to find a buyer in a hurry.

It is a company with very lumpy earnings per share from half year to half year and very low ROE and ROA.

Just read the chairmans AGM address. Interesting - profits exposed to AUD and price of silver. There's some headwinds there. The company is also struggling to grow revenue over the past few years. Very small dividend. There isn't much about this company (without knowing anything about it) that the figures make me fall in love with it.

Best wishes.

 

[Boggo]

Also, with fundamental analysis, is it wise to keep track of all announcements made by the company, and what kind of news can affect the stock ? where can i obtain this news ? Right now im just basing all my knowledge on its financial reports which is more backward looking, rather than whats happening at this point in time.

No harm in taking note of what the reports say as they come out but you are quite correct in saying that they are backward looking.

ORG had some positive news today where they reported on their progress in the December quarter...
http://www.asx.com.au/asx/statistics/announcements.do?by=asxCode&asxCode=ORG&timeframe=D&period=W

Now, take a look at the daily chart of ORG below, especially the highlighted month of December and you will see that the chart was/is a more accurate representation of what is occurring in (close to) real time.
There are obviously some that are not waiting for the news and the amended ratios .

The reverse too is even more important, waiting for the news to confirm why a downtrend has been in place for some time will cost you dearly if you are holding on.

Find a way to stay ahead of the report dependent crowd if you can, the smart money does.

(click to expand)

 

[YMI]

...Find a way to stay ahead of the report dependent crowd if you can, the smart money does.

Two ways I can think of are speculation and insider trading, the latter even more risky.
Is there another way?

 

[So_Cynical]

Two ways I can think of are speculation and insider trading, the latter even more risky.
Is there another way?

Can i suggest betting on inevitability, simply buying cheap in the expectation that average will return as average almost always does.

To easy. :dunno:

-----------------

I really really should of bought ORG at under $10, made it onto the short list twice and i passed...damm.

 

[YMI]

Can i suggest betting on inevitability, simply buying cheap in the expectation that average will return as average almost always does.

To easy. :dunno:

Thanks for the reply
Yea, I guess that’s pretty clever but you need to be sure it’s a healthy company which has products with high demand in future.

 

[McLovin]

Thanks for the reply
Yea, I guess that’s pretty clever but you need to be sure it’s a healthy company which has products with high demand in future.

Which with a bit of work is not that hard to do. Good companies don't go bad overnight, and vice-versa. Impending disaster is usually telegraphed well in advance. It takes a bit of work to see it but it's rarely a black swan, despite what most pundits will tell you.

At the end of the day being conservative pays more than speculating. When buying a company, it's far more profitable to have a lot of false negatives than false positives.

 

[prawn_86]

When buying a company, it's far more profitable to have a lot of false negatives than false positives.

Very true, but when you do pass on one that in hindsight is a no brainer it is still annoying. FKP is a case in point for me

 

[CanOz]

Which with a bit of work is not that hard to do. Good companies don't go bad overnight, and vice-versa. Impending disaster is usually telegraphed well in advance. It takes a bit of work to see it but it's rarely a black swan, despite what most pundits will tell you.

At the end of the day being conservative pays more than speculating. It's far more profitable to have a lot of false negatives than false positives.

I'd love to combine an algorithm (say the 20% flipper) with fundamental analysis one day...track it for a year and see if a little research can help weed out the bad seeds...

CanOz

 

[CanOz]

Very true, but when you do pass on one that in hindsight is a no brainer it is still annoying. FKP is a case in point for me

My comp pick this month Prawn!

 

[McLovin]

I'd love to combine an algorithm (say the 20% flipper) with fundamental analysis one day...track it for a year and see if a little research can help weed out the bad seeds...

CanOz

Oooo...TA and FA singing kumbaya together. It would be interesting, I wonder how well it would work though.

Very true, but when you do pass on one that in hindsight is a no brainer it is still annoying. FKP is a case in point for me

Of course, but it doesn't actually mean you were wrong, just well disciplined. At least that's how I like to think of it, doesn't hurt so mucht that way.

 

[burglar]

... If Camden was looking at it then it must have some merit.

Analysis by result?

 

[CanOz]

Oooo...TA and FA singing kumbaya together. It would be interesting, I wonder how well it would work though.

Wouldn't be too hard to find out...just need someone to research the trades as it spits them out...hint hint

 

[burglar]

Two ways I can think of are speculation and insider trading, the latter even more risky.
Is there another way?

Show the chart to a three year old!

 

[McLovin]

Analysis by result?

Nope. Just a pretty good poster on HC who has no doubt spent far longer looking at this company that I have..