As a prelude to this discussion, I wrote about intrinsic and market value last week in the Investment Corner. This is a rare instance, so I recommend reading this post on fundamental and technical analyses and then further exploring intrinsic and market value with this post (Intrinsic vs. Market Price/Value).

Whatever path you’ve taken to understand security evaluation, hopefully, you will walk away with more information to guide your investment decisions.

Fundamental Analyses vs. Technical Analysis

Fundamental analyses evaluate a security by attempting to measure the intrinsic value (see the above post for more detail on intrinsic value). On the other hand, technical analysis focuses on statistical trends to find pattern recognition against moving day averages (time series dependent).

Both analyses are valuable tools professional data nerds—I mean, investment professionals—use to determine investment selection. Our research team at Whitaker-Myers Wealth Managers spends countless hours conducting the necessary research to provide our clients with the best portfolio options. To understand these methodologies further, let’s explore each one at a high level.

Fundamental Analyses

Fundamental Analyses are the primary tools business owners use to determine what a company is worth. This is where accountants and finance leaders review the organization's books with a fine-toothed comb. Reviewing balance sheets, statements of cash flows, and many other documents provide the necessary detail to determine ‘value.’ Value is a broad classification, but those combing through this data traditionally look for these key metrics (we’ll explore each of these in detail in future posts):

• Price to earnings ratio (P/E)

• Earnings per share (EPS)

• Projected growth rate (PEGR) or Projected growth (PEG)

• Free Cash flow (FCF)

• Price to book ratio (P/B)

• Dividend Payout ratio (DPR)

• Price to sales (P/S)

• Debt to equity ratio (D/E)

• Return on equity (ROE)

• Return on Assets (ROA)

• Qualitative metrics

• Macroeconomic and microeconomic variable

• Company sentiment (influenced by news as well)

You may be familiar with many of these, but some you may not be familiar with. Don’t worry; we’ll have deep dives into each of these soon.  As you can imagine, in our current technologically connected lives, there are components of the fundamental analysis metrics that have value but do not appear in the abovementioned metrics. Think about a business with goodwill or intellectual property; how do we value those? Goodwill and Intellectual property are difficult to quantify since they are intangible in terms of assets or liabilities. However, these are essential variables when considering the value of a company.

Technical Analysis

A technical analysis uses mathematical calculations against time variables and other factors to create averages and trends. If you’ve ever heard an advisor talk about day-moving averages, this is part of a technical analysis. Different technical analysis components include historical data to support pricing trends and patterns, volume analyses, momentum tracking, support and resistance analysis, defined relative strength, and many other stratified calculations providing varying levels of granularity. This is an in-depth analysis looking at the correlation between historical events and security price fluctuations. This data is used to predict where the security may move in the near future.

Many complicated mathematical and graphical models are combined to create these charts. The traditional ‘candle stick’ graph (shown below in Figure 1) is frequently used in these analyses. These analysts use various candle stick patterns as they formulate their projections.

Figure 1

Source: Investopedia.com

What is right for you?

Depending on where you are in your baby steps or investment journey, your financial advisor may recommend utilizing some of these tools to align your strategic goals. Our team at Whitaker-Myers Wealth Managers has the tools and knowledge to walk with you on your journey.