Do You Still Believe in Fundamental Analysis ?
- Rohit Musale, CFA
- 5 days ago
- 2 min read
Think again, if you think that your fundamental analysis of stocks is serving you.
Have a look at these numbers.
These are the latest numbers of Colgate and Meesho.
These kinds of numbers are not uncommon in the stock market.
How can a company that is not yet making money be valued at two times that of a company that is already making money !
To me, these numbers are staggering.
This goes to show why the stock market is a forward looking mechanism.
The stock market gives more weightage to what is going to happen in the future rather than what is already there on the current balance sheet.
This is why I personally give less weightage to fundamentals.
For me, fundamentals are just one piece of the puzzle.
I personally do 5 kinds of analysis when it comes to stock selection.
Liquidity
Comparative
Technical
Fundamental
Market
If you read William O’Neill’s book "How to Make Money in Stocks", he has documented the fact that when he looked at leading stocks of past multiple decades, he found that only 4 fundamental factors make most of the impact in the price movement of a stock.
EPS
Sales
ROE
Margins
He looked at other factors like PE, cash flow, and ratios, but after mining through the data, he ultimately came to the conclusion that it is these 4 factors that matter the most.
And you can see it play out in these numbers of Colgate and Meesho.
The stock market is probably anticipating very high growth for Meesho going forward, which is why it is receiving this kind of valuation in spite of the fact that it is still not making money.
So the point is, fundamental analysis is not sacrosanct.
The technicals matter too.
I know it is not fair to compare 2 stocks from different industry groups.
However, the argument here is, my money is my money.
I can "choose" to put it in Colgate or in Meesho.
I have that choice.
So why not compare the two ?
Unless you are a value investor with a long time horizon (at least 10 years), you will have to look at technicals and current market conditions.
Else you could get a negative surprise.
Regards,
Rohit Musale, CFA
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