Fundamental Analysis...I'm Doing It Wrong?

[Sehan 10]

I was browsing the stocks people are watching over at Investopedia and one that came up was Atmel Corp. I decided to investigate them a bit further and after doing a few quick calculations in my head and looking at the P/E, ROA, ROE and ROI data calculated by Reuters I thought they were nothing special and seemed to be underperforming versus the rest of their industry and over priced.

 

That was fine until I looked at the Reuters rating and it was 'Buy' and quite highly recommended at that. It was about this point that confusion set in Seeing as I've only been looking at this stuff for about a week I'm assuming that they have it correct and I've messed up but for the life of me I can't tell why. From the data here though I don't see why this would be an attractive purchase at all.

 

I had a look at their balance sheet and income statement and while they have their dept well covered I can't see anything that makes me think I should buy.

 

I made an attempt at calculating their ROCE but came up with approx. 1/120 so I think I did that wrong. Going on what wikipedia told me I had pretax operating profit (10) divided by total assets (1713) - current liabilities (562) which gave me my result...which in my rather inexpert opinion seems like a pretty crap return if it's correct.

 

Any suggestions on how I've misread the data and/or miscalculated the ROCE are appreciated.

 

Cheers

[brownsfan019 17]

Sehan - I'm going to be up-front, if you want a discussion on fundies, I suggest finding another forum. Perhaps there's a few fundie guys around here, but my guess is that most are technical traders and rarely (if at all) look at pe ratios, etc.

[atto 20]

Yes, brownsfan is absolutely correct. We are pretty much completely technical analysis, but I do want to reply to a few things in your post.

I was browsing the stocks people are watching over at Investopedia and one that came up was Atmel Corp.

While it's great you're doing your own research, I wouldn't rely on random internet postings to pick your stocks for you (assuming that's what you want to do).

I decided to investigate them a bit further and after doing a few quick calculations in my head and looking at the P/E, ROA, ROE and ROI data calculated by Reuters I thought they were nothing special and seemed to be underperforming versus the rest of their industry and over priced... it was 'Buy' and quite highly recommended at that.

In general, the big analysis firms do not have an outstanding track record. To be dead honest, these ratings do have a history of manipulation. If they did work well, you could just do what they say and make easy money. Most analysis you may do based on pure numbers (P/E's, ROA's, etc) has little significant benefit, simply because (in general) the market has already priced in the value of the company. With fundemental analysis (and to an extent, technical analysis), you're banking on the fact that you can price a company better than the market (a very challenging feat).

...I'm assuming that they have it correct and I've messed up but for the life of me I can't tell why.

Never assume in this game. As I mentioned above, they have very little edge (if any). In the future, if a edge you use and stick to has you buying or selling an instrument, don't listen to the chit-chat. That assumes you have an edge, but that's a different story.

 

To be fair, I know very little about this company, and I do not primarily trade stocks. That said, I took a look, here's what I see (and please don't trade off this, I'm just showing you an alternative perspective).

 

 

The stock has been hit fairly hard recently, and can't be considered in an uptrend yet. Furthermore, it's nearing some potential resistance above. There is very little volume above this (by price), which could also resist upward movement. However, if it does break upwards, it should move pretty well. A potential upside target would be 4.20-4.40 due to previous value and possible resistance. There seems to be a decent sized area of value around where it is now (with a slight bearish bent, currently). There also seems to be some steady buyers at 3.10-3.20, so if it breaks below this, you may have problems. I would personally wait for more signs of accumulation before considering a buy (this is only the opinion of a random internet poster, remember ).

[OAC 10]

I was browsing the stocks people are watching over at Investopedia and one that came up was Atmel Corp. I decided to investigate them a bit further and after doing a few quick calculations in my head and looking at the P/E, ROA, ROE and ROI data calculated by Reuters I thought they were nothing special and seemed to be underperforming versus the rest of their industry and over priced.

 

 

The stock market is a forward looking mechanism. Stock price is a reflection of expectation of future earnings, especially when dealing with high-tech companies. If their current financial is mediocre, and there is a good REASON why it is over-priced. In general, there is probably positive outlooking on the company regarding such matters as new products in the pipeline, major contracts to be signed, adoption of new management...etc.

[darthtrader2.0 10]

Most analysis you may do based on pure numbers (P/E's, ROA's, etc) has little significant benefit, simply because (in general) the market has already priced in the value of the company. .

 

I'm a TA converted fundamental guy. To me there are two paths you can take...get really deep into aswath damodaran stuff or stick with old Ben Graham...The problem with Damodaran type stuff is that your going to have to make big speculations on interest rates and expected returns in your model. The bigger problem is that it would be a huge project to be able to automate this valuation process. You have to assume that the market is efficient enough that if you randomly pick a stock it will not be undervalued.

Even if you find "gold" most the time it will be fools gold because your directly betting that your analysis is better than well paid teams of analyst who's job it is to understand all the variables. The most likely bet is that your missing a very important variable.

Basically, I think fundamental analysis is the most difficult type of analysis you can do yet in the retail literature there is this air of it being easy. I think Buffet does a huge disservice to the investor community with his ideas. Its like if Tiger Woods talked about how to golf by saying "I just hit the ball". While thats totally true the big hidden variable there is "you aint Tiger Woods".

[Sehan 10]

Cheers for the replies guys. It has certainly been eye opening. I've been pouring over articles on Investopedia and fundamental analysis seems to be the subject of a huge proportion of the material so I decided to try my hand at that to begin with but as you guys have mentioned....one person with a background in computer science is unlikely to out perform a team of qualified investors....especially seeing as how I have exactly 5 days of experience at this

 

I'm going to continue fooling around on the simulator at investopedia for a while more I think and especially up until I've done a good bit more research.

 

Thanks for the help.

[darvasfan 10]

If you want to save yourself alot of time looking for the right approach, I would strongly suggest reading Nicholas Darvas "How I made $2,000,000 in the Stock Market" and then go right to William O'Neal's most recent book titled "The Successful Investor". That will get you off to a great start. You'll find, however, that both authors/traders recommend melding fundamental with technical analysis.

 

The first big question you should answer is why do you want to be buying stocks in a down market?

[bootstrap 47]

stock fundies fall into two distinct camps, Growth and Value. Depending on which camp you fall in will determine how you interpret information and what you will want to focus on.

 

but the fundamentals only get you so for. don't listen to CNBC and think that the few who know what is going on are only trading the fundamentals. the fundamentals are used as a filter and the trade is technical.

 

if you want a quick easy read on analyzing stocks check out Harry Domash's book.

[brownsfan019 17]

the fundamentals are used as a filter and the trade is technical.

 

That's actually not true at all. Your big money managers - American Funds, Vanguard, etc. - rely on fundies almost exclusively, unless the particular fund prospectus details otherwise. The big funds are NOT looking at VSA, waves, fans, etc. etc.

 

They are too big to try to play a value area or the hammer on the weekly chart. They are the reason the VAH and hammers exist. The big boys CREATE the technicals that we look at as traders.

 

I spent quite a bit of time at different funds while I was a broker and now that I have seen the fundie and technical side, I can tell you w/o a doubt that most (if not all) major funds are fundie related. And I'm talking the big boys here, the ones that have to take MONTHS to build a position. And MONTHS to unload a position.

 

On that side of the tracks the talk is p/e, peggy, sharpe, etc.

[bootstrap 47]

i was not referencing the big funds, but i stand corrected. i was referring to the stock traders/brokers/hedge fund guys that i personally know.

 

they use the funnymentals to find companies that the big boys are most likely to go after and wait for the move to start.