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Equity Fundamentals (Part One)

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Equity Fundamentals consists of two phases. The first is projected performance, and the second is past fundamental trends. The first stage requires building on the work of others. Use analysts and investment bank projections for the future by looking at Price to Earnings and Price Earnings Growth in “Forward (future) Years”. The second phase requires looking at the firm’s quarterly fundamental trend over the past year, and the year over year fundamental change over the last 3 years. Both phases reveal firms with good fundamentals, while eliminating companies with poor fundamentals.

The first step is acquiring estimates of the future value of the company. You need the future estimates of the price to earnings (P/E). Firms with P/E’s projected to grow by analysts are preferred. These aren’t always available, but are very valuable when they are found. Analysts with substantially more information then you typically acquire these based on fundamentals, but you will filter out bad or unlikely estimates in the technical and fundamental trend levels.

Firms with a below average Price to Earnings now and higher than current, above average future P/E are good for Long candidates. This indicates the price of the share relative to its earnings are estimated to rise. Firms with an above average Price to Earnings now, but a below average future P/E are good Short candidates, since the price of the share relative to its earnings are going to fall. Note that in both cases, you can leave out the current year requirement if there are too few firms which meet the category.

You also need to know the earnings per share of the companies being considered, both currently and in the future years. For Longs, you want positive recently, but growth in both forward year 1 and forward year 2. The greater the rise, and the higher the change, the better. Higher than industry average estimates are attractive and preferred. For Shorts, you want negative recently, and further declines in both forward year 1 and forward year 2. The greater the decline, the better it is for the short, especially if it remains below industry average estimate for forward year 1 and forward year 2.

Finally, take a look at the current and future price to earnings growth. For Longs: You want the current Price to Earnings Growth to be low, below one. In future years you want to see increases, where each year is above one and rising. For Shorts: You want the current Price to Earnings Growth to be high, above one, falling consecutively below one in future years.

Lastly, you want to know the company’s dividends and dividend yield. Dividends are a gain from long equity positions, but they are paid out from your account for short equity positions, and create a loss. A portfolio should always have a net positive dividend weight: Long Dividends – Short Dividends should always be greater than zero for the entire portfolio, and its best if its greater than zero for each long/short spread. If each spread is positive, you don’t have to worry about the remaining portfolio having a negative net dividend outflow when spreads that reach the stop loss are killed off. Be sure you know the dividend dates and payout amounts per payment! It is preferable that the frequency of payments is higher for purchases than short sales.

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International Economic Analysis:

  • Major Currency Economic Summaries
  • Performance of Major Imports and Exports
  • Mandates of Central Banks versus Expectations
  • Performance Indexes of Major Economies
  • Economically Correlated Currency Projections
  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
  • Occasional: Foregin Exchange Technicals Markups

American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

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