Step 3 - Fundamental Analysis

5-Step Investing Formula
Online Course Manual
Step 3: Fundamental Anaylsis
5
Section 5 of 11
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THE 5-STEP INVESTING FORMULA www.investools.com Step 3: Fundamental Analysis
Section Contents
SECTION 5 Step 3: Fundamental Analysis

Phase 1 ................................................................................................. 5
Phase 2 ................................................................................................. 8
Price Pattern .................................................................................. 10
Volatility ......................................................................................... 13
Zacks Report ................................................................................. 15
Market Guide ................................................................................. 20
News ............................................................................................. 25
AutoAnalyzer™ .................................................................................... 29
© 2005 INVESTools Inc. All rights reserved. page 2 of 31

Course Overview
INTRODUCTION SECTION 6 Step 4: Technical Analysis

SECTION 1 Getting Started Technical Indicators
Logging into the INVESTools Investor Toolbox Moving Averages
Support Links MACD
Workshop Review Stochastics
Account Information Volume
Subscription Renewal Support & Resistance
Technical Support Buy Signals
Contact an Instructor Money Management
Sell Stop Orders
SECTION 2 Introduction to Investing How Many Shares to Buy
Tolerance for Risk Sell Signals
Setting Goals Insider Trading
Asset Allocation
Tax Exposure SECTION 7 Step 5: Portfolio Management
Brokerage Firms Creating a Portfolio
Introduction to the 5-Step Investing Formula Managing Your Portfolio
Paper Trading Account
THE 5-STEP INVESTING FORMULA

BONUS SECTION
SECTION 3 Step 1: Searching for Stocks
Using a Prebuilt Search SECTION 8 Bonus Topics
Navigating the List of Stocks TurboSearch
Index Tracking Stocks / Exchange-Traded Funds
SECTION 4 Step 2: Industry Group Analysis Dow Jones Industrial Average—
Top-Down Analysis The Diamonds (DIA)
Big Chart S&P 500—The Spider (SPY)
AutoAnalyzing All Stocks in a Group NASDAQ—The Qs (QQQQ)
Best & Worst Industries List
SECTION 9 Introduction to Options
Advantages/Risks of Options
SECTION 5 Step 3: Fundamental Analysis Leverage
Phase 1 Call Options
Phase 2 Put Options
Price Pattern Covered Calls
Volatility
Zacks Report SECTION 10 Appendix
Market Guide Phase 2 Stock Scoring Form
News Phase 2 Quick List for Zacks Report and
AutoAnalyzer™ Market Guide
Investment Tracking Record
SECTION 11 Glossary

Step 3: Fundamental Analysis

Fundamental analysis is the process of determining whether or not a particular
company is a good investment.
The first step in fundamental analysis is Phase 1, which is included as part of

the search results page. However, it is only a shortcut to determining whether
a stock is good or bad and is less important than the Phase 2 process.
Phase 2 is the most important part of the fundamental investigative process.

The Investor Toolbox now automatically scores nearly all of Phase 2 for you.
But to understand what makes a fundamentally sound company, we will show
you what the computer is grading point by point.
By doing fundamental analysis on a company, you reduce or limit the amount

of emotion that comes with an investment decision: either a stock passes or
it doesn’t. Fundamentals tell us the good and bad, helping reduce risk. Good
fundamentals provide a great foundation for companies to build on. It’s been
said: “Know the fundamentals and trade the technicals.”

Phase 1
The Phase 1 score is the first step in a
fundamental analysis. This score is shown
on the search results page (these scores are
updated every 24 hours).
To learn about Phase 1 we’ll use Hovnanian

Enterprises (HOV) stock as an example. In
the search results table, this stock scores
9/2 for Phase 1—an excellent score.
Remember, Phase 1 is just a shortcut,

whereas Phase 2 is more in-depth and
reveals more of a company’s fiscal strength.
Note: Evaluate every stock... don’t just buy

the first stock on the list.
Finding the Phase 1 Score

Another way to find the Phase 1 score for a
stock is to go to the main graph of the stock
and then scroll down below the graph.
Remember, click on the stock symbol on

the search results page to access the stock
graph.
The Phase 1 chart is located below the

graph on the left-hand side. Here it lists
the individual scores of the 13 criteria that
comprise Phase 1. These criteria look for
those things that have traditionally signaled
value in a stock.

This is a close-up image of the Phase 1

filter for HOV—the components that make
up the Phase 1 score. The table consists of
the following information:
1. Description: Indicates the criteria.

The link takes you to a full definition
of the term, what it measures and
what is considered a good or bad
value.
2. Value: Shows the actual value for that

criterion.
3. Phase 1: Shows how each criterion

scored:
• Green “up” arrow = positive
• Red “down” arrow = negative
• No arrow = neutral
4. Phase 1 Score: The Phase 1 score

total. The first number shows how
many criteria are positive (green
arrows). The second number shows Note: The positive score (9) is always over the negative score (2) in
how many criteria are negative the total Phase 1 score.
(red arrows). Neutral scores are not
displayed.
This graph shows all the parameters used

to score stocks for Phase 1. These criteria
form the undervalued growth filter, which
we use to give stocks a Phase 1 score.
There are reasons why each criterion

is positive, negative, or neutral. As an
example, let’s look at the following criteria
to see how the scores are figured:
• EPS, Price, and Group Rank
• Debt/Equity Ratio
• Volume Ratio 5/30 Day

EPS, Price and Group Rank: Measure

how well the stock is performing versus all
other stocks in the database when looking
at earnings per share growth, price growth,
and group strength. These numbers are
between 0 and 99.5, with 0 being the worst
and 99.5 being the best.
For these criteria, you want a score of

70 or higher anything below 30 is bad;
anything in between 30 and 70 is neutral.
In the Phase 1 box, HOV scores 80, 99.5,
and 88, respectively. These scores are each
above 70, giving HOV green arrows and a
positive score for these criteria.
Debt/Equity Ratio: Measures how much

debt the company has compared to equity
in the company. The lower the debt ratio,
the better. The chart shows you want a
score of less than 20—anything greater than
100 is bad, while anything else is neutral.
HOV scores 133.3%, which is in the bad
range, so it scores a negative for Debt/
Equity Ratio.
Volume 5/30-Day Ratio: Measures the

average volume in the stock over the
past five days compared with the average
volume over the past 30 days. A reading of
100 means the average volume is the same.
A reading of 150 means volume over the
past five days has been 50% higher than
normal, etc.
Anything 150+ gets a green arrow, 50 or

lower gets a red arrow, and anything in
between is considered neutral. HOV scores
as a neutral in this area.
You can continue by looking at each

criterion listed in Phase 1 and comparing
it to the “indicator” chart to see why it has
received a good or bad score.

Phase 1 Summary
Think of Phase 1 as curbside appeal. You
would never buy a house just because it
looks nice from the curbside. Nice curbside
appeal may get you interested in a house,
but you would get a full inspection of
the house before purchasing it. Phase 1
is curbside appeal, while Phase 2 is the
inspection.
Phase 2
Phase 2 is a systematic, repeatable process
that looks more closely at the company’s
fundamentals. It is the most important
part of the fundamental analysis grade
and has been largely automated by the
Investor Toolbox.
With the Phase 2 scoring system, a stock

either scores well or it doesn’t. Following
the same process over and over again
helps you drill down to and focus on only
those stocks really worth having in your
portfolio. Before you watch a stock for a
buy signal, as we’ll outline in Step 4, the
stock MUST score well in Phase 2.

When scoring Phase 2, we evaluate five

criteria, as noted on the Phase 2 scoring
form seen here. (A copy of this form is
included in the appendix of this manual.)
The five criteria are:
1. Price Pattern: Determines whether

the stock is moving up, down, or
sideways.
2. Volatility: How fast the stock moves

up and down on a daily, weekly, and
monthly basis. Scoring volatility helps
you determine how comfortable you’ll
be if you own this stock.
3. Zacks Report: Measures the future

by looking at what the analysts
(professionals in the investing world)
are projecting for the company’s
future earnings.
4. Market Guide: A measurement of

how well the company has done in the
past.
5. News: Measures what’s happening

with a company at the present time.
Recent company news can affect the
overall Phase 2 score positively or
negatively.
Scoring Phase 2 involves giving individual

scores to each component (price pattern,
volatility, Zacks Report, Market Guide, and
news). The components break down into
the following scoring elements:
A = 4.0 (Excellent)
B = 3.0 (Good)
C = 2.0 (Neutral)
D = 1.0 (Poor)
F = 0.0 (Bad)
When the computer shows the automated

Phase 2 scoring, it uses a four-point scale
similar to how most colleges report grades.
A 4.0 is a strong “A” and a 0.0 is a failing
grade or “F.”

Price Pattern
When looking at a stock chart, look at the
price pattern to find its basic direction (up,
sideways, or down).
When the computer scores the price pattern,

it looks at the one-year and five-year charts
to determine the overall price pattern score.
It puts heavier emphasis on how the stock
has traded in the past six months compared
to how it traded five years ago.
To score a 4.0 (A), the stock must be

moving upward on both the one-year and
five-year charts. If the stock is primarily
moving sideways, it scores a 2.0 (C). If the
stock is moving downward, the score is 0.0
(F).
Looking at an example, this is a company

with one-year and five-year charts that are
moving/trending upward; thus, both charts
(1 Year)
score 4.0 (A). So whether you’re playing
the stock short term on the one-year graph
or long term on the five-year graph, the
score for price pattern is 4.0 (A).
4.0 (A)

4.0 (A)
(5 Year)

4.0 (A)

The charts seen here are an example of a

stock with a price pattern that has been
moving downward in both its one-year and (1 Year)
five-year time frames. Thus, both charts
score 0.0 (F).
0.0 (F)

0.0 (F)
(5 Year)

0.0 (F)
This last example is of a stock that has been

trending flat in its one-year chart but has
been moving upward in its five-year chart. (1 Year)
To get the correct score, average these
grades, putting greater emphasis on the
more recent activity. In this example, the
score is between 2.50 and 3.0, which is an
acceptable price pattern.
2.0 (C)

?
(5 Year) 
4.0 (A)

These are the one-year and five-year charts

for COCO, our stock from the search
results. The price pattern in the one-year (1 Year)
chart is moving upward (in an uptrend),
making the score for the one-year chart 4.0
(A). The price pattern in COCO’s five-year
chart is also moving upward, making the
score for that chart 4.0 (A).
4.0 (A)

A
(5 Year)

4.0 (A)
The overall price pattern score for COCO

is 4.0 (A).
COCO 4.00 (A)

Volatility
Volatility is an indication of risk. It
measures the magnitude of a stock’s price
movements up and down in a given time
period.
Looking at a chart’s price movements can

help you prepare for future emotions. On
average, a 10% to 20% or less monthly
move in a stock is considered normal.
If a stock is highly volatile, as seen in

this example, you’ll find yourself on an
emotional roller coaster as the stock moves
up and down. If you recognize this pattern
exists before you buy the stock, you’ll
better be able to prepare yourself to guard
against your emotions.
The Investor Toolbox scores volatility

based on how a stock compares to the
baseline average. To get this average, the
system looks at 3,000 optionable stocks
over the past year and measures how fast
they’ve been moving up and down on a
monthly basis.
The system then does the same analysis on

the stock you are analyzing, comparing its
volatility to the baseline average. If the stock
has the SAME volatility as the large basket
of stocks, it scores 2.0 (C); if it is LESS Note: If you see a stock resembling the pattern above, be prepared for some
volatile, the stock scores above 2.0; if it is wild swings... and give it an F score, for now.
more volatile, the stock scores below 2.0.
Therefore, the closer the volatility score is to
4.0, the less volatile the stock; the closer the
score is to 0.0, the more volatile the stock.

Conservative investors should focus on

stocks with average or low volatility (scores
of 2.0 or higher), as seen in this example.
More aggressive investors can consider
stocks with higher volatility (scores less
than 2.0).
The automated score can be found directly

beneath the stock chart in the Phase 2 area COCO
(discussed later). For the purpose of this
example, we have placed the automated
volatility score on COCO’s chart. It scores
a 3.0 (B) for volatility and is less volatile
than most other stocks.
Automated Scoring
Volatility 3.00
2.0 = Average Volatility
3.0 = Less Volatile
In the Phase 2 scoring form, give COCO a

3.0 (B) for volatility, as shown here.
COCO 4.00 (A) 3.00 (B)

Zacks Report
The next step in the systematic process of
company evaluation is the Zacks Report,
which looks at what the analysts are saying
about the company’s future potential.
To get to the Zacks Report, go to the chart

of the company and click on the “Zacks
Earnings Estimates” link under the Phase 2
heading in the left-hand menu.
This brings up the Zacks Earnings

Estimates page.
(Note: When you access the Zacks Report 4.0 = A

in the Investor Toolbox, the entire report is
in one page you’ll need to scroll through. 3.0 = B
Here we’ve broken it into four sections to
make it easier to view.) 2.0 = C
We look at four things when scoring the 1.0 = D
Zacks Report:
0.0 = F
1. Wall Street Estimates
2. Company VS Industry Comparison
3. Quarterly Earnings Surprises
4. Current Ratings
Each item is made up of components, as

outlined below, that must meet certain
requirements. If the requirements are
met, that section scores a 4.0 (A). If any
requirement is not met, take the score down
one grade for each missed item.

Wall Street Estimates

Here you score the first and last column, as
highlighted in the example.
1. In the “MEAN” column, look for the

year-over-year earnings estimates to
increase. COCO has increasing yearly
estimates, so start the grade as 4.0
(A).
2. In the “MEAN” column, look

for quarter-over-quarter earnings
estimates to increase. COCO has
increasing estimates, so keep the score
4.0 (A).
3. For “NEXT 5 YR. GROWTH (%),”

look for it to be above 20%. COCO is
above 20% (24.37), which keeps the
score 4.0 (A).
4. In the “MEAN CHG LAST MNTH”

column, positive numbers are good
and negative numbers (down grades)
are cause for concern. Score the
first four numbers only as a unit,
4.0 (A)
not individually. If the numbers total
zero or higher, grade positively. If
they total less than zero, the section
grade falls one point. The numbers
for COCO are zero, which is positive;
thus, keep the score 4.0 (A) for Wall
Street Estimates.
Wall Street Estimates, the first section of

the Zacks Report, scores 4.0 (A).

Company VS Industry
Now we’ll compare COCO against its
industry group by looking at the EPS
Growth Rates for both the company and its
industry. The first comparison is the growth Score ‘N/A’ as neutral.
rate of annual earnings over the past five Do not lower the grade.
years of the company versus the industry.
The second comparison is between the
growth rates over the past 12 months of the
company versus the industry. Finally, we’ll
look at the expected growth rates for the
next 12 months and the expected annual
growth rate of earnings over the next five
years.
1. You want the “COMPANY” to be

equal to or larger than the “IND”
(industry) in the first four columns
(earnings and growth rates).
3.0 (B)
2. Start with 4.0 (A) and drop the score
down once for each time the company
falls below the industry group in each
area.
COCO has “N/A” listed for the first five

years, as it is too new a company. Score
“N/A” as neutral rather than grading
down. In the Cur/Last column, COCO
drops a score to 3.0 (B), as the industry
outperforms COCO. However, COCO beats
the industry in the next two columns, so the
overall section score remains 3.0 (B).
It is not necessary to score the “P/E ON

CUR YR EPS” column, though it is good
for determining whether or not you are
paying a premium for the company. In
the case of COCO, the company has done
better than the industry, plus the P/E ratio
is less than the industry average, so you
are underpaying for performance. This is a
bonus!
The total score for the Company vs.

Industry score on COCO is 3.0 (B).

Quarterly Earnings Surprises

Analysts project earnings for a company
before the company reports their earnings
results. If company earnings are higher than
expected, the company beats the forecast
and the stock generally goes up in value. If
the company misses its forecast, the stock’s
value is likely to drop.
1. To score 4.0 (A), the company

(“Actual EPS”) needs to meet or
4.0 (A)
exceed the earnings expectations
(“Mean Estimate”).
2. Start with 4.0 (A) and bring down

the score once for each time the
company does not meet or exceed the
expectations.
Note: If an “N/A” appears on the most

recent quarter, it is because the most recent
information is not yet available. Treat N/A
scores as neutral; do not drop the grade
down.
Quarterly Earnings Surprises for COCO

gets a 4.0 (A).
Current Ratings
Looking at the analysts’ recommendations
can help you determine what they think the
future of the company is. For the stock to
score well in this section, you want to see
analysts recommending to “buy” the stock.
1. Determine where most analysts have

placed their recommendation (strong
buy, moderate buy, hold, moderate
sell, or strong sell).
2. Find the “Mean Rating” number and

score it according to the scale:
Mean Rating
1.0-1.5 = A
1.0 - 1.5 =A
1.6-2.5 = B 1.6 - 2.5 =B
2.6-3.5 = C 2.6 - 3.5 =C
3.6+ = F 3.6 + =F
COCO has a rating of 1.9, giving it a “B”
score (3.0) for Current Ratings. 3.0 (B)

Zacks Report Summary for COCO

Go back and look at the scores you’ve
given COCO for the different sections and
average them together to get your Zacks
Report score:
4.0 (A)
1. Wall Street Estimates: 4.0 (A)
COCO is projected to increase year
over year and quarter over quarter; it
is also projected to grow more than
20%. Analysts have not downgraded
the stock. COCO scores a 4.0 (A) for
A
this section.
2. Company vs. Industry: 3.0 (B) 3.0 (B)

COCO did not beat its industry in the
“Cur/Last” comparison, so it scores a
3.0 (B).
3. Quarterly Earnings Surprise: 4.0

(A)
COCO has beat expectations every
4.0 (A)
quarter, so it scores a 4.0 (A).
4. Current Ratings: 3.0 (B)

Since the COCO rating is a 1.9, it gets
3.0 (B)
a 3.0 (B).
Now, take the score from every section and

give it an average score. In this case the
average score is a 3.5 (A).
The Zacks Reports scores 3.5 (A) for the

Phase 2 analysis.
COCO 4.00 (A) 3.00 (B) 3.50 (A)

Market Guide Report

The Market Guide Report looks at how
the company has performed in the past.
The links for the Market Guide Report are
located in the left-hand menu under the
“Phase 2” heading on the stock graph page.
There are two sections in the Market Guide

Report we will look at:
1. Snapshot
2. Highlights
Snapshot
Seen here is the top portion of the Market
Guide Snapshot page. It contains a
paragraph with information about the type
of business the company is in and how the
business has done for the quarter being
reported.
Also, along the right side of the page is the

company information—name and contact
information, as well as basic data on the
company. This is for your information only
and is not scored. Scroll to the bottom part
of the Snapshot page.

In the “Key Ratios & Statistics” table,

find the “Return on Equity” under the
“Management Effectiveness” heading.
This indicator measures how efficiently
the company’s leaders are running the
company. The higher the ROE, the more
efficiently products are being produced and
the more likely it is that the company will
continue to accelerate profits.
Return on equity (ROE) should be 18% or

better (this is the average ROE of stocks in
the S&P 500). COCO has an ROE of 34.44,
which is better than 18%, so it scores 4.0
(A). Score ROE accordingly:
18+ 4.0 (A)

15-17.99 3.0 (B)
12-14.99 2.0 (C)
9-11.99 1.0 (D)
Below 9 0.0 (F)
If the ROE is less than 18%, look to see if

the industry group is at 18% or better, then
reduce the ROE score by one grade for
every three points below the 18% standard. 4.0 (A)
To compare the company’s ROE against
its industry ROE, click on the “Company
Profile” link under the “Company Reports”
heading in the left-hand menu. When the
page comes up, scroll down to the heading
“Company Comparison.” Look to the left
side to find “Return on Equity,” which
contains both the company and industry
ROE numbers.
If the industry group is less than the 18%

standard, this group does not traditionally
meet the average. Thus, the standard by
which you should measure the company is
the industry group ROE. If the group ROE
is lower than 18% and the company ROE is
higher than the group, score it 4.0 (A).
If the group is less than 18% and the

company is less than the group, reduce the
score one grade for each three points it is
below the group number.
The computer does this comparison

automatically for you.

Highlights
Next, look at the Highlights for COCO.
Access this by clicking on the “Highlights”
link in the left-hand menu under “Market
Guide Report.”
This brings up the Highlights page for

COCO.
There are three sections to score for the

Market Guide Report in Highlights:
1. Revenue
2. Earnings Per Share
3. Growth Rates

Revenue
You want revenue to have year-over-year
increases. Look for consistently increasing
numbers each year. If revenue stays the
same or falls from one year to the next,
drop the score one point for each instance.
If the final year’s number is smaller than

the preceding year, make sure the year is
complete. The “total” for the final year is
only a running total for whatever quarters
have been completed thus far.
Note: If the last year is not complete, look

4.0 (A)
to see that the quarters recorded have
revenues increasing over the previous year.
COCO scores 4.0 (A) for revenue because

it is growing revenue every year.
Earnings Per Share

You want earnings per share growing year
over year.
Again, look for consistently increasing

numbers each year. If earnings per share
stays the same or falls from one year to
the next, drop the score one point for each
instance. Investors want to see increased
sales translate into increased earnings.
Note: As with the revenues, if the final

year’s number is smaller than the preceding
year, make sure the year is complete. The 4.0 (A)
“total” for the final year is only a running
total for whatever quarters have been
completed thus far.
COCO scores a 4.0 (A) in this section, as

the earnings are growing every year.
Growth Rates
In the “1 Year” column of growth rates, you
want to see three things:
25% or more
• Sales growth rates of 25% or more EPS higher than Sales
25% or more
• EPS growth rates of 25% or more
• The EPS growing faster than Sales

4.0 (A)

In most cases when EPS is growing faster

than sales, it is a sign of efficiency. For
every additional dollar in sales, even more
of that dollar is added to the bottom line in
the form of profits or earnings.
COCO starts this section with 4.0 (A) and

maintains it because sales and EPS are
more than 25%; it then keeps that score
because the EPS is higher than sales.
Market Guide Summary for COCO

To complete the scoring for the Market
Guide, average the scores of the four
components: 4.0 (A)
1. Return on Equity: 4.0 (A)
You want this number to be over 18%.
2. Revenue increasing year over year:

4.0 (A) 4.0 (A)
Revenue is continually increasing
year over year.
3. Earnings Per Share increasing year

over year: 4.0 (A)
Earnings are continually increasing
year over year. 4.0 (A)
A
4. Growth Rates for Earnings: 4.0 (A)
EPS and sales one-year growth rates
are both greater than 25% with the
EPS growth higher than sales growth.
4.0 (A)
The average/final Market Guide score for

COCO is 4.0 (A).
COCO 4.00 (A) 3.00 (B) 3.50 (A) 4.00 (A)

News
The last part of fundamental analysis/
Phase 2 is news. Good or bad, news can
impact the Phase 2 score. While Zacks and
Market Guide provide insight into the past
and future possibilities for the company,
news can identify current changes in the
company.
News offers information about what’s

happening with a company now. Looking
at the news, you need to determine whether
that information is good or bad—whether
something is happening that could impact
the stock.
News is considered good when a company

announces they’ve beaten their earnings
estimates, received a significant contract,
split their stock, or opened new facilities,
etc. Such events lead us to believe the
company is moving in a direction of more
revenue and more earnings, which are
always good.
News is considered bad when, for example,

a company doesn’t meet earnings estimates,
there is a class action lawsuit against the
company, or the company loses a major
contract. These kinds of events can impact
the stock negatively.
To get to the news for a company, enter the

stock symbol in the “Quote” field at the top
left-hand side of the page and click on the
“Go” button.

This brings up a one-year graph of that

company.
The trend is in
place. The news
will likely ‘pass.’
Scroll down past the stock graph and Phase

1/Phase 2 scoring until you get to the
“Company News Headlines.”
From here:
1. Look at the headlines for the

company’s name or stock symbol.
2. If you want to read an entire news

story, click on the headline of
the story. This takes you to the
complete article.
3. Look for headlines to be

generally positive, like earnings
reports, stock splits, new product
announcements, etc.; or generally
negative, like a drop in earnings.
In general, news is either good or bad. Thus,

we score the news as either “pass” or “fail.”
For news to FAIL, two things must happen:
1. Bad news must occur (bad earnings,

losing a major contract, etc.).
2. The stock must go down as a

result of the bad news.
Both conditions must apply before giving a

failing grade. It may seem intuitive that if

bad news occurs, a stock will go down. But

what you might consider to be bad news,
the market may not care about, since the
market has already factored that news in.
Remember, news drives stock prices to the
extent that it is new news or different than
what was expected.
To view more news titles, click on the

“More Titles” link at the bottom of the page.
(If this link does not appear at the bottom of
the page, no more news is available.)
Note: As you go through the news for

a stock, please note that the Investor
Toolbox only holds either up to 1,000 news
stories or the past 90 days’ worth of news,
whichever comes first.
Also, remember that no news is good news.
Here is an example of a headline for

COCO. From reading the headline and
brief description, it appears that COCO has
been upgraded to overweight. This is good
news. To read more about this, click on the
headline.

This brings up the entire story. Read

through the story to make sure the news is
positive. News = Pass
Give the news a “pass” grade if the news is

generally good or a “fail” grade if the news
isn’t good. In the case of COCO, the news
is positive, so it scores 4.0 (A).
Score news as 4.0 (A) for the Phase 2

analysis on COCO.
COCO 4.00 (A) 3.00 (B) 3.50 (A) 4.00 (A) Pass

AutoAnalyzer TM
The Investor Toolbox offers the

AutoAnalyzer feature, which automates
most of the Phase 2 process.
To access the AutoAnalyzer on any stock,

from the stock you’re analyzing, scroll
down below the chart. To the right of
the Phase 1 table is the Phase 2 table,
automatically scored.
This feature automatically scores four

of the five areas of Phase 2. It does not,
however, score news (something you
need to analyze yourself). This is a very
powerful feature, but what’s more important
is that having reviewed the components of
Phase 2, you know what the numbers mean
and why they are good or bad scores.
Here the Phase 2 scores are broken down

for you. Using our example of COCO, the
scores are as follows: MG-Zacks:
3.25 or higher
• MG-Zacks Combined score: 3.75
• Zacks: 3.50 Price Pattern:

2.50 or higher
• Market Guide: 4.00
• Price Pattern: 4.00

Note: News must still
• Volatility: 3.00
be reviewed as part of
the Phase 2 process.
(MG-Zacks is an average score of both the
Zacks Report and Market Guide Report.

Scoring Phase 2, you want a minimum of:
• MG-Zacks: 3.25 or higher
• Price Pattern: 2.50 or higher
• Volatility: above 2.00 (conservative)

below 2.00 (aggressive)
• News: “Pass”
Note: Volatility is the only personal

preference in this list.
A stock must meet these required scores to

pass Phase 2.
If a stock does not meet the requirements

of Price Pattern, MG-Zacks, and News,
the stock will not likely provide proper
buy signals compared to a stock that
does fit this profile. If you choose to play
stocks outside the system, do so in a very
conservative manner.
AutoAnalyzer Summary
TM
Now you can score a stock manually and

check it against the AutoAnalyzer score or
simply use the AutoAnalyzer score as your
main resource for Phase 2 scoring. This
process makes Phase 2 systematic, quick,
and easy.
Note: Remember, news must still be

reviewed directly as a part of Phase 2. The
AutoAnalyzer does not score news. As you
increase your knowledge of the stock and
option markets, although it’s a bit time-
consuming, keeping up with current news is
essential for confidence, profit, and success.
Everything you’ve done up to this point is

called fundamental analysis. The next step
involves technical analysis.

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Step 3 - Fundamental Analysis

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Step 3 - Fundamental Analysis

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5-Step Investing Formula

Online Course Manual

Step 3: Fundamental Anaylsis

© 2005 INVESTools Inc. All rights reserved.

SECTION 5 Step 3: Fundamental Analysis

Price Pattern .................................................................................. 10

Zacks Report ................................................................................. 15

Market Guide ................................................................................. 20

© 2005 INVESTools Inc. All rights reserved. page 2 of 31

INTRODUCTION SECTION 6 Step 4: Technical Analysis

THE 5-STEP INVESTING FORMULA

© 2005 INVESTools Inc. All rights reserved. page 3 of 31

Step 3: Fundamental Analysis

The first step in fundamental analysis is Phase 1, which is included as part of

Phase 2 is the most important part of the fundamental investigative process.

By doing fundamental analysis on a company, you reduce or limit the amount

© 2005 INVESTools Inc. All rights reserved. page 4 of 31

To learn about Phase 1 we’ll use Hovnanian

Remember, Phase 1 is just a shortcut,

Note: Evaluate every stock... don’t just buy

Finding the Phase 1 Score

Remember, click on the stock symbol on

The Phase 1 chart is located below the

© 2005 INVESTools Inc. All rights reserved. page 5 of 31

This is a close-up image of the Phase 1

1. Description: Indicates the criteria.

2. Value: Shows the actual value for that

3. Phase 1: Shows how each criterion

• Green “up” arrow = positive

• Red “down” arrow = negative

4. Phase 1 Score: The Phase 1 score

This graph shows all the parameters used

There are reasons why each criterion

• EPS, Price, and Group Rank

• Volume Ratio 5/30 Day

© 2005 INVESTools Inc. All rights reserved. page 6 of 31

EPS, Price and Group Rank: Measure

For these criteria, you want a score of

Debt/Equity Ratio: Measures how much

Volume 5/30-Day Ratio: Measures the

Anything 150+ gets a green arrow, 50 or

You can continue by looking at each

© 2005 INVESTools Inc. All rights reserved. page 7 of 31

With the Phase 2 scoring system, a stock

© 2005 INVESTools Inc. All rights reserved. page 8 of 31

When scoring Phase 2, we evaluate five

The five criteria are:

1. Price Pattern: Determines whether

2. Volatility: How fast the stock moves

3. Zacks Report: Measures the future

4. Market Guide: A measurement of

5. News: Measures what’s happening

Scoring Phase 2 involves giving individual

When the computer shows the automated

© 2005 INVESTools Inc. All rights reserved. page 9 of 31

When the computer scores the price pattern,

To score a 4.0 (A), the stock must be

Looking at an example, this is a company

© 2005 INVESTools Inc. All rights reserved. page 10 of 31

The charts seen here are an example of a

This last example is of a stock that has been

© 2005 INVESTools Inc. All rights reserved. page 11 of 31

These are the one-year and five-year charts