Monday, August 29, 2011

How to pick a long term stocks: Fundamental Analysis

Stock Market Investment is not every ones piece of cake. Decision making on selecting long term stocks is not easy. Investing for long term asks investors to look at shares differently than short-term traders. In this article we will see at those parameters that will help your select a good long-term stocks.

Always start your search by looking at fundamental of the company

Looking at stocks fundamentals gives an idea whether a particular stock is for long term or for short term investment horizon. Companies fundamentals will tell the investors that whether the company is financially healthy to generate reasonably income in future. After all it is the income that drives your possible future profits. Related to the possible future income of the company, the stocks prices are valued. The importance of valuation of stocks is that, investors must end up buying overvalued stocks. Investors shall always buy undervalued stocks.

Stock Fundamental (1) – Growing Dividend Payment

A company which pays regular dividends to its shareholders with consistent growth hints at the predictability of its consistent future earnings. Dividends payments are results of companies retained earnings. Increasing dividend payment hints at increasing cumulative retained earnings

Stock Fundamental (2) – Price Earning Ratio (P/E) analysis is important

This is one stock fundamental that gives an idea to the investors that whether the stock is overvalued or undervalued. Comparing a stocks P/E ratio with its sector P/E ratio and also with its competitors P/E will give a fair idea that whether the company is overpriced or underpriced. One can also compare the overall P/E ration of Index (Nasdaq, Sensex, Nifty etc) with companies individual P/E will also help is analyzing that a share is overvalued or undervalued.

Stock Fundamental (3) – Volatile Earnings shall be carefully analyzed

The earnings of a company is very closely related to the overall economy. When economy is doing good the earnings are high and vice versa. Predictability of future earnings is a very great way of deciding on the long-term prospects of a share. In financial statements of the company, the owners do forecast the possible future earnings. In case company themselves are not optimistic about future earnings then it is sign for investors to be careful and not too-bullish. But in long run, the companies which are honest with their forecasts are generally great companies to invest for long term.

Stock Fundamental (4) – Watch companies debt profile

A company which does its business depending lot on borrowed debts are not as reliable as low debt companies. There are times when economy is not doing great, like in times of increasing interest rates, high inflation rates, companies with high level of debt are risky companies to invest for long term. In good economic scenario, where cheaper debt is available, companies can use this cheap debt to make to leverage their profitability. Ratio of companies asset to debt ratio is a good indicator of judging whether a company is working with too much debt or playing within their limits.
Understanding economic scenario and then investing is a great way of buying long term stocks. In times of crisis majority of investors are selling their holding, thus stocks are available at a very undervalued prices. In such moments of crisis (which is advantage for value investors) long term investors shall buy more and more quality companies.


Analyzing and investing for long term requires two important things, (1) Great deal of patience and waiting, (2) And when times comes to invest, you will require huge amount of cash. So the golden rule of long term investment is to go on accumulating savings (when other are busy buying overvalued stocks) and start buying shares when other in panicky selling their share holdings.
Do you like this post?


Post a Comment

Related Posts with Thumbnails