Figure a Company’ Fundamentals Into It’s Long-Term Value
June 14th, 2016
Most companies experience one or more blips along the way that can affect their stock prices, but most times the problems aren’t disastrous.
When they are, however, do go running for the hills and join in a sell-off? Or have you invested for the long term and researched the company well enough to recognize whether the decline represents a fundamental change or is simply a temporary reaction to some external or internal force and that the price is likely to recover?
Two key places to start gauging a company’s fundamentals are the annual report and current events.
The Annual Report: You should receive a copy of the annual report of each stock you hold through the mail. The reports are also typically available in the Investor Relations section of an enterprise’s website. In addition, The Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (SEDAR) allows investors to research most documents and information filed by public companies.
A company’s annual report contains several key nuggets of information, including:
- Letter to Shareholders. Scrutinize the letter from the President/CEO. Look for a discussion of why management believes the company’s future is bright and signs that the company is being forthright about the challenges it faces.
- Management Team. You also want to examine how a company’s management responds when the going gets tough. A share’s price is often the judge of how effective leadership is.
- Products and/or Services. The annual report will also often address how the company is keeping up with changing times as well as meeting its competition. If a competitor is responding to such customer demands as adding healthier options to a fast-food chain menu, can the same be said for the fast-food company in your portfolio?
Current Events: The news is a great source of information about corporations. It can provide insight into the steps a company takes to position itself for the future as well as alert investors to potential problems. Each nugget of information may affect whether the company’s stock price will go up or down.
When it comes to actually buying a stock, some investors opt to buy shares in a company whose stock prices have been beaten down in the short term. These investors believe that the price will eventually rebound and base that consideration on their knowledge of such fundamentals as the company’s potential for long-term growth and recovery, its products and its position in an industry.
These strategies, along with diversifying your portfolio, can help mitigate risk. They’re also an opportunity to talk to your adviser about whether it’s a good time to add to your holdings, or an indication of an ongoing problem suggesting it could be time to cut your losses and move on. (Be careful not to trigger an unexpected tax liability when selling. Consult with your tax adviser.)
Although there are no guarantees, history illustrates that over the long term, the stock market outperforms other investments. As risk tolerance and timeline vary with each individual investor, it’s important to consult your professional adviser to help determine the strategy that best suits your situation.
Develop A Baseline
How a company has handled challenges in the past is often a good indication of its potential for long-term growth and investment returns.
If you know the fundamentals of an enterprise you invest in, take a long-term view and stay apprised of changes within the company and how current events could affect the stock’s value, you are in a better position to maintain solid returns in your portfolio.
A share’s price generally depends on several factors including the:
- Size, profitability and financial stability of the company;
- Capability of its management;
- State of the economy; and
- Strength of its competition.
Developing a baseline will help you to identify if the original reasons why you and your financial adviser decided this company was a good fit for your long-term goals and risk tolerance still stand – and whether this could be an opportunity to add to your holdings.