Why Should a Trader Bother About the Fundamentals of a Company ?
- Rohit Musale, CFA
- Mar 4
- 2 min read
This is the daily timeframe chart of L&T.
The company needs no introduction.
I have also attached the quarterly sales and EPS table here.
Here is what I see in L&T:
- Declining EPS growth in latest 3 quarters.
- Declining / Flat sales growth in the latest 3 quarters.
- Negative growth rate in EPS in the latest quarter.
I now check the chart of L&T.
The stock has collapsed almost 15% from the top.......
that too, in less than a week or so.
This is not some penny stock.
Its a huge company with a huge market cap.
Some traders might blame this crash on the war in Middle East.
But I want to ask a basic question:
Long before the war began, the fundamental numbers were already on the table.
Right ?
Any trader who paid attention to the most basic numbers would have stayed away from this stock.
In my Orange Trading System, I personally do 5 kinds of analysis while investigating a stock:
- Liquidity
- Comparative
- Technical
- Fundamental
- Market
It takes me less than 2 minutes to run this analysis on any stock.
Because,
I know exactly what I am looking for.
All my criteria is pre-defined.
The stock either meets my criteria or it does not.
Its plain black and white.
There is no room for subjectivity here.
In my fundamental analysis, I do pay attention to the latest 3 quarters of sales and EPS growth rates.
One glance would have told me in a fraction of a second that this stock was not worth my time.
William O' Neil describes the CANSLIM system in his book:
How to Make Money in Stocks
In CANSLIM, the C stands for current earnings.
In this chapter, he talks about the importance of quarterly numbers.
For both Sales and EPS.
Here is what I notice:
- He wants the current quarter EPS growth rate to be 40% or more.
- He wants the current quarter Sales growth rate to be 25% or more.
- He also wants the sales and EPS growth rates to accelerate over the latest 3 quarters.
- He also wants the current quarter EPS growth rate to be higher than the annual EPS growth rate.
None of the above 4 statements are true for L&T.
My question is: Do you have a criteria that automatically keeps you away from trouble ?
Or do you find yourself down in a stock you own and do not know how to handle the situation ?
There is only one solution to this problem.
Clarity.
Ensure that you know exactly what you are looking for.
Do not get fooled by the brand name or popularity of the stock.
I have seen stocks like Asian Paints do nothing for years.
Be objective in your approach.
Trade Management and Risk Management can be subjective.
But stock selection should be strict. (as much as possible)
Its far far easier to reject a stock than to select one.
Rejection is a more important skill than selection.
Regards,
Rohit Musale, CFA
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