Introduction to Stock Analysis Part 1: Fundamental Analysis

Wall Street has many analysts, strategists, and portfolio managers hired to do one thing: beat the market.

Analysts are hired to find stocks that are undervalued by the market. Strategists are hired to predict market trends and different sectors. Portfolio managers are hired to create the best portfolio, often compared to general market indices like Dow Jones or S&P 500.

Or simply put, to make profits in the market requires various methods to understand businesses and stocks, to maximize profits and reduce investment risks.

The two most popular analysis methods in the stock market are Fundamental Analysis and Technical Analysis. Among which:

• Fundamental Analysis (Fundamental Analysis) will focus on any factors affecting the intrinsic value of a stock.

  Intrinsic Value (intrinsic value) is the value of a stock based on the business's development potential, different from book value or market price.

  Factors affecting intrinsic value may include:

  • from macroeconomics, industry trends to

  • more micro factors such as business operations and the company's future prospects,…

  Nhà đầu tư cơ bản sẽ mua cổ phiếu khi giá trị nội tại cao hơn giá thị trường hiện tại.

• Technical Analysis (Technical Analysis): based on technical charts (time series) of stocks/derivatives to forecast future price trends (not concerned with the stock's intrinsic value).

The rationale behind Technical Analysis: Technical Analysts believe that stock prices fluctuate according to supply-demand balance.

• The fluctuation of stock prices/volume of derivatives is sufficient to reflect market psychology: supply and demand for that stock.

Subscribe now

In part 1 of the article “Introduction to Stock Analysis” this week, Viet Hustler will focus on the introductory concepts of Fundamental Analysis including the following main contents:

1. Introduction to Fundamental Analysis.

2. Common indicators in Fundamental Analysis.

3. Stock selection method using the CANSLIM model.

Introduction to Fundamental Analysis (Fundamental Analysis)

Fundamental Analysis (Fundamental Analysis - FA) is the activity of measuring the intrinsic value of a stock…

• … based on related factors such as macroeconomics, industry position, business performance results, and the company's future prospects.

Fundamental Analysis includes 3 main areas:

1. Economic Analysis

   • Macro factors that can impact company operations such as: interest rates, GDP, exchange rates, inflation, public debt, budget deficit, tax policies, savings rate,… → Evaluate the health of the economy.

2. Industry Analysis

   • Typically, industries go through repeating cycles:

     Formation → Expansion → Saturation → Decline.

     When investors choose industries in the stage of Expansion (Growth): growth stocks will outperform — both industry-leading companies and underperforming companies will have good operational reports.

3. Business Analysis

• Non-Financial analysis (Non-Financial analysis): Bao gồm khả năng lãnh đạo, ban quản lý, quản trị doanh nghiệp, tầm nhìn tương lai,…

• Phân tích tài chính (Financial Analysis): Sử dụng báo cáo tài chính và các chỉ số.

  • Các chỉ số này sẽ được Viet Hustler liệt kê bên dưới.

Dựa vào các phân tích này, nhà đầu tư sẽ xác định được giá trị nội tại của cổ phiếu (intrinsic value).

• Nếu giá trị nội tại cao hơn giá thị trường thì nên mua cổ phiếu đó.

Các nhà đầu tư có thể lựa chọn phân tích cơ bản theo 2 phương pháp:

• Top-down (phân tích từ trên xuống): ưu tiên theo thứ tự:

  Biến động của môi trường Vĩ mô >>

  Ngành (ngành có triển vọng so với các ngành khác) >>

  Công ty (công ty được kỳ vọng tốt nhất trong ngành).

• Bottom up (phân tích từ dưới lên): Tập trung vào các chỉ số cơ bản và định tính của mỗi cổ phiếu trong một khoảng thời gian nhất định như: tình hình tài chính, sản phẩm, hiệu quả hoạt động,…

  • ít chú ý đến các chỉ số kinh tế vĩ mô hoặc triển vọng ngành.

Phân tích cơ bản: Các chỉ số trong Phân tích tài chính (Financial Analysis)

1. Thu nhập trên mỗi cổ phiếu (Earnings per Share - EPS)

Earnings per Share (EPS) là phần lợi nhuận sau thuế trên mỗi cổ phiếu thường

• EPS cho nhà đầu tư biết họ có quyền sở hữu bao nhiêu đồng lợi nhuận của công ty trên mỗi cổ phiếu thường họ nắm giữ.

  (nhưng không đồng nghĩa với việc họ nhận từng đó cổ tức)

EPS càng cao, mức sinh lời của công ty càng lớn. EPS cao đồng nghĩa với:

• Công ty đạt lợi nhuận cao hơn và có khả năng tăng trưởng trong tương lai.

• Trong cùng một ngành, công ty có chỉ số EPS cao hơn sẽ có khả năng sinh lời tốt hơn.

2. Giá trên thu nhập của cổ phiếu (Price to Earnings - P/E)

P/E cho biết giá cổ phiếu hiện tại cao hơn thu nhập từ cổ phiếu đó bao nhiêu lần,

• i.e. nhà đầu tư (NĐT) phải bỏ ra bao nhiêu đồng vốn để có được 1 đồng thu nhập.

P/E cao hay thấp là tốt?

• P/E cao: ~ thị trường kỳ vọng về việc tăng trưởng thu nhập từ cổ phiếu đó trong tương lai.

  • Ví dụ: $NVIDIA hiện có P/E bằng 95.88

    ~ NĐT chấp nhận bỏ ra $95.88 để đổi lấy $1 lợi nhuận từ NVIDIA.

    → NĐT sẵn sàng trả một mức “premium” (phần bù) cho các doanh nghiệp hàng đầu => P/E của họ trở lên rất cao.

    (P/E sàn Nasdaq niêm yết cổ phiếu NVIDIA chỉ khoảng ~25)

    

  P/E cao cũng chưa chắc đã tốt: đôi khi đây là biểu hiện việc doanh nghiệp kinh doanh kém hiệu quả → EPS thấp (thậm chí = 0) → P/E cao.

• P/E thấp: có thể do nhà đầu tư hạ kỳ vọng về doanh nghiệp → Bán chốt lời → Giá cổ phiếu giảm → P/E giảm.

  • Tuy nhiên P/E thấp lại là tốt trong trường hợp doanh nghiệp hoạt động hiệu quả hơn → EPS tăng → P/E thấp.

    • Trong trường hợp này: cổ phiếu đang bị định giá thấp và là cơ hội để nhà đầu tư mua vào.

The P/E ratio of the business being high or low doesn't have much meaning if considered alone

• It needs to be compared with the industry P/E as well as the company's expected profit and earnings growth rate.

3. Price to Book - P/B

The P/B ratio indicates how many times higher the stock price is compared to the book value of the business.

• Book Value per Share: the balance sheet value of the business / per share.

  • Similar to when the business goes bankrupt, liquidates assets, pays off all debts, and the remaining amount is divided equally per common share.

Is high or low P/B good?

• High P/B: Sign that the market expects promising business prospects for the enterprise in the future.

  => Investors are willing to pay more than the asset value of the business.

  • However, high debt in the business also makes Book Value low → high P/B.

• Low P/B: Sign that investors value the market price lower than Book Value.

  • However, low P/B is positive when the business is in the recovery phase (of a business cycle):

    => business results gradually improve, profits increase, helping Book Value increase → The stock is undervalued → Opportunity to buy the stock.

High or low P/B is difficult to evaluate alone and needs to consider other factors.

• To determine if a stock is undervalued, investors need to compare it with competitors and the industry average.

4. Price to Sales - P/S

When the business is incurring losses, P/S will be a negative number and no longer meaningful for analysis (Investors cannot pay a price less than 0 for that business).

→ The P/S ratio is an effective indicator for evaluating the business in this case.

P/S measures the market value paid for the revenue portion per share.

• i.e., how much investors are paying for one unit of revenue from the business.

Is high or low P/S good?

• Low P/S may indicate the stock is undervalued, while P/S higher than the industry average may mean the stock is overvalued.

The P/S ratio only reflects the market's view on revenue while ignoring the entire cost structure and debt.

• Therefore, P/S is quite limited in fully reflecting the operational efficiency picture of the business.

5. Dividend Payout Ratio

Dividend Payout Ratio: the % ratio of net profit used to pay dividends to shareholders.

What is a reasonable Dividend Payout Ratio?

• The higher the Dividend Payout Ratio, the more attention the stock receives from investors, as they will receive a higher dividend level for each share held.

6. Dividend yield

Dividend yield is the return rate that investors can receive from dividends if buying the stock at the current price.

The general investor psychology is: “Stocks that pay cash dividends are always better than stocks that do not pay cash dividends”

Therefore, a stock with a higher Dividend yield will have a correspondingly higher valuation.

• For example, a stock with a Dividend yield higher than the industry average is also considered relatively “cheap”.

Stock selection method according to the CANSLIM model

CANSLIM is a model to help investors select good growth stocks, invented by William O’Neil. CANSLIM is an acronym for 7 letters including:

• C (Current Quarterly Earnings Per Share): Current quarterly earnings growth.

• A (Annual Earnings Growth): Annual earnings growth.

• N (New Products or Management or Price High): New management, new products, new highs.

• S (Share Outstanding): Number of outstanding shares.

• L (Leading Industry): Leading stock in the industry.

• I (Institutional Sponsorship): Financial institutions.

• M (Market Direction): Market direction.

C: Current Quarterly Earnings Per Share – Current quarterly earnings growth (The higher the better)

• EPS growth must reach at least 20% – 25% QoQ.

  • In addition, investors should compare EPS with the same period last year to avoid the influence of seasonal factors.

• Earnings must come from core business operations, excluding one-time unusual income items.

Note: There must be alignment between revenue growth and earnings growth.

• Strong quarterly earnings growth must always be accompanied by at least 20% – 25% growth in the most recent quarter's revenue compared to the same period.

• Question companies with earnings growth not accompanied by revenue growth.

A: Annual Earnings Increases – Annual earnings growth: Seek explosive increases

• Companies must operate profitably for 3 consecutive years.

• Annual earnings growth rate must increase steadily over 3 years.

• Annual EPS growth averaging 20 – 25% or higher.

• Most recent quarter's or year's after-tax earnings reaches or nearly reaches a new high.

• ROE of 17% or higher.

Note: William O’Neil proposed the criterion of steady annual EPS growth to identify strong growth companies without regard to business cycles.

• For newly listed companies, EPS growth for each of the last 3 quarters must increase continuously by over 20% compared to the same period.

N: New Products, New Management, New Highs – New products, new management: Buy at the right time

• Seek companies that have successfully developed important new products or services, or benefited from new management.

• Buy stock on breakout from a base at a stable price level heading toward a new high.

S: Supply and Demand: Stock supply-demand (Good stocks will have strong demand)

• Seek companies buying back their own shares in the market, implying expectation of future growth.

• Monitor daily traded share volume to gauge overall market demand for the stock.

  • Small float stocks will also have higher price volatility → Higher risk for investors.

• At the new price breakout, volume must increase at least +50% compared to the average volume of the prior 50 sessions.

L: Leader or Laggard – Leading stock/Laggard stock

• Buy top companies in the industry and avoid laggard stocks.

I: Institutional Sponsorship – Financial institutions, investment funds: Follow the leaders

• Seek companies with a large portion of shares held by institutional investors (investment funds, banks, etc.).

• Continuous selling by company insiders or institutions is a negative signal to monitor.

M: Market Direction – Market direction

• Observe the market carefully and wisely.

In summary, the CANSLIM stock selection method includes the following specific criteria:

1. EPS Growth QoQ > 15%.

2. EPS Growth YoY > 10%.

3. Previous year's EPS Growth > 10%.

4. Forecasted EPS Growth for next year > 0.

5. ROE > 15%.

6. Current price is at least 15% lower than the highest price in the last 52 weeks.

7. Current price is higher than the average price of the last 50 sessions.

8. RSI in the top 25% of stocks with the highest RSI.

Conclusion

In this week's article, Viet Hustler introduced the most basic knowledge about the school of Fundamental Analysis, when investors focus on finding companies trading at prices below their INTRINSIC VALUE.

• The intrinsic value of the business is closely related to factors such as growth potential, risks the business may face, cash flow factors…

• Any deviation from the intrinsic value is a sign that the company's stock is below or above the intrinsic value, thereby helping investors identify stocks that can be invested in for profit.

• Representative of the fundamental analysis school is Warren Buffet. He successfully applied this method with an average return of 20.9%/year over 50 years.

Next week, Viet Hustler will introduce the school of Technical Analysis remaining. How will technical indicators be used? And should investors use Fundamental Analysis or Technical Analysis to maximize profits? This will be the next content in “Introduction to Stock Analysis (Part 2)” by Viet Hustler.

References:

1. Drakopoulou J (2015), A Review of Fundamental and Technical Stock Analysis Techniques.

2. Dr. Sreemoyee Guha Roy (2013), Equity Research: Fundamental and Technical Analysis.

3. Adam Hayes (2023), Simple Moving Average (SMA): What It Is and the Formula.

4. Brian Dolan (2023), MACD Indicator Explained, with Formula, Examples, and Limitations.

5. Jason FERNANDO Fernando (2023), Relative Strength Index (RSI) Indicator Explained With Formula.

6. Harvard Business Review (1965), Exploit the Product Life Cycle.