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Registered User
Joined: 3/19/2005
Posts: 13
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We all know that TC is all about technical analysis. I have some other software (MarketGrader) that just works with Fundamental data. When I find good stocks to buy in TC, they almost always have bad fundamentals.
Does this surprize you or is this expected that Technical and Fundamental Analysis never seem to confirm one another???
Thanks,
Larry
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Worden Trainer
Joined: 10/7/2004
Posts: 65,138
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The trainers aren't supposed to get into interpretation, so I might be overstepping a bit, but it does not surprise me. That said, you can probably get a lot more in the way of useful information on this issue from other traders. I'm moving this topic to the Stock and Market Talk forum where they are more likely to see it and comment.
-Bruce
Personal Criteria Formulas
TC2000 Support Articles
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Registered User
Joined: 12/19/2004
Posts: 457
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I don't find this surprising at all. Some of my best trades involve following trends in stocks that most fundamentalists think are terrible, lol.
This dispute between fundamental and technical analysis is moot, because different things work for different people. Suffice it to say that technicians believe that price leads fundamentals much of the time, and I've been successful trading by that motto.
Just keep in mind that GOOD fundamental analysis is very difficult and time consuming. Strictly going by ratios and earnings growth, via database screens, without understanding the busines, and what the financials mean, is asking for trouble.
Much of the garbage that passes for fundamental analysis is rightly criticized by technicians as "funny-mentals." Funny-mentals are essentially stories based on superficial economic logic, used by corporations, investment banks, brokers, etc. to encourage people to buy their stocks.
Some abused concepts:
1. Low P/E: Some stocks have low P/E's because they are undervalued. Others have low P/E's because they deserve to be cheap. You can't just compare P/E ratios. You need to know how the accounting conventions, revenue recognition policies, expensing vs. amortizing costs, affect net income. Only when the accounting statments of BOTH companies are rendered comparable, can the P/E be meaningfull compared. And even after that, P/E only tells you about historical data, not about future data.
2. Earnings growth: Companies with rapidly growing earnings derived from genuine sales growth will only move up in price if the growth is above average. The economists call it "abnormal profit."
But there are all sorts of things companies can do to trick you into thinking earnings are growing. Are margins abnormally high because the company is using up Net Operating Losses from prior quarters to reduce taxes? Once these tax benefits are used up, profit after taxes will decrease as tax rates revert to normal.
Are they growing by acquisitions? Are they extending credit to risky customers, who are unlikely to pay their bills?
There is really no short cut to learning fundamental analysis. You need to take time to learn how financials are reported, what they mean, and most important, WHAT OTHERS THINK THEY MEAN. You need to think for yourself.
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Registered User
Joined: 3/19/2005
Posts: 13
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Thanks, this helps a lot!
Larry Buss
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Registered User
Joined: 1/28/2005
Posts: 6,049
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What I try to do is create watchlists of stocks with good fundamentals. If the stocks look good technically
you have the best of both worlds.
A good book to check out is "WHAT WORKS ON WALLSTREET"
by James O'Shaughnessy.
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Registered User
Joined: 12/18/2004
Posts: 180
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I have to throw my two-cents in on this. I had been doing Discounted Cash Flow analysis for a while. This is a method of figuring the intrinsic value of a company based on expected growth rates of free cash flow over an infinite period of time that are discounted to the present based on interest rates, beta, etc. (the calculation is similar to an exponential moving average). Debt is also taken into the calculation. I got really sophisticated with it, and had even developed my own way of normalizing debt based on the average debt repayment as percentage of debt outstanding and new debt issued for each year over the last 5-years, and always used the most conservative growth estimate I could come up with for the period. I would always try to start with only the companies that were growing earnings in the double digits, high ROEs, etc. in an attempt to find stocks possessing all of the best fundamental attributes. Thus far, I can tell you that I have found absolutely no correlation in the performance of the stock price with these fundametals--in fact, IMO these are some of the worst performing stocks on the market (LLL, PG, DELL-which dropped a bomb shortly thereafter-). I think this type of analysis is used mostly by those who plan on holding stocks for decades (Warren Buffet), and even then, just think of all that can change. I would say that I've learned not to place much emphasis on at least the value aspect of fundamental analysis for anything that can be considered a reasonable holding period.
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Registered User
Joined: 12/18/2004
Posts: 180
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And just for the record, I just ran across a note where I had valued EFII at around $16 several months ago. Look at what that has done (not to mention it was well above $20 when I ran it).
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Registered User
Joined: 12/19/2004
Posts: 457
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Stm,
I actually have a few books on DCF, valuation, etc. After reviewing them, I looked at some reviews on Amazon, and others seem to confirm your views.
I don't dispute the idea that fundamentals move prices. What is really important, IMHO, is what fundamentals the market is focusing on.
I suspect that at a secular market bottom, DCF techniques would be very profitable. But at a secular market top, these type of stocks are boring, and no one is interested in them.
There is no clear cut way to interpret fundamental data. Fundamentals must always be interpreted in context. There is no replacement for experience and judgement.
Take receivables or inventories rising faster than sales.
This is a trend that can't be sustained over the long term, and it often indicates the company will miss earnings in a future quarter. This type of analysis can give very good lead times before the miss--ie a few quarters.
Yet, there are often reasonable explanations, such as management anticipating future orders (in the case of inventory), or a company going through a rapid growth phase (in the case of receivables).
Simply looking at the trends, and making mechanical decisions based on ratios, etc. does not work with fundamental analysis.
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 Gold Customer
Joined: 3/10/2005
Posts: 12
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I believe that ta and fa do confirm each other but the issue is over how much time it takes fundamentals to catch up. I only buy from Value Line's top rated 400 stocks, a lazy person's way to fundamentally value stocks (though they lean towards growth). There are frequent buying opportunities.
Just received my new Worden video on spotting buying opportunities. Unless I am mistaken broadcast media is poised to move up. A couple of VL 400 stocks picked up by these techniques are UVN and SBGI.
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