Fundamental AnalysisWhat isFundamental Analysis?
Fundamental analysisis the examinationof the underlyingfor ces thataffect the well beingof the
economy, industry groups,and companies.As with mostanalysis, the goal is to derivea for ecastand
pr of it from future price movements.At the company level,fundamental analysismay involve examination
of financial data, management, business conceptand competition.At the industry level, there might bean
examinationof supplyand demandfor cesfor the productsof fered.For the national economy,
fundamental analysismight focus on economic datatoassess the presentand future growthof the
economy. Tofor ecast future stock prices,fundamental analysiscombines economic, industry,and
companyanalysisto deriveastock's current f air valueandfor ecast future value. If f air value is not equal
to the current stock price,fundamental analysts believe that the stock is either over or under valuedand
the market price will ultimately gr avitate towards f air value.Fundamentalists do not heed theadviceof the
r andom walkersand believe that marketsare weak-for m efficient. By believing that prices do not
accur ately reflectallavailable infor mation,fundamental analysts look to capitalize on perceived price
Even though there is no one clear-cut method,abreakdown is presented below in the order an investor
might proceed. This method employsatop-downapproach that starts with the over all economyand then
works down from industry groups to specific companies.As partof theanalysisprocess, it is important to
remember thatall infor mation is relative. Industry groupsare comparedagainst other industry groupsand
companiesagainst other companies. Usually, companiesare compared with others in the same group.
For example,atelecom oper ator (Verizon) would be compared toanother telecom oper ator (SBC Corp),
not toan oil company (ChevronTexaco).
Firstandfor emost inatop-downapproach would bean over all evaluationof the gener al economy. The
economy is like the tideand the various industry groupsand individual companiesare like boats. When
the economy expands, most industry groupsand companies benefitand grow. When the economy
declines, most sectorsand companies usually suffer. Many economists link economic expansionand
contr action to the levelof interest r ates. Interest r atesare seenasaleading indicator for the stock market
as well. Below isachartof the S&P 500and the yield on the 10-year note over the last 30 years.
Although not exact,acorrelation between stock pricesand interest r ates can be seen. Onceascenario
for the over all economy has been developed,an investor can break down the economy into its various