Fundamental Analysis Criteria

Nortorious · 26 October 2011

Hi All,

I have been reading Julian Dawson's book titled "Wealth Wisdom".

In his book, Julian identifies some selection criteria using fundamental analysis. I'm still learning fundamental analysis techniques and am hoping that the more experienced investors here might be able to critique the criteria that the author identified for short listing stocks for long term investment (with capital growth and passive income as the objectives).

The author uses the criteria below for short listing stocks (refers to this as his objective analysis) and then uses subjective reasons for finalising stocks to invest in.

1. Average dividend per share growth. Is it greater than 7 per cent?
2. Average revenue growth. Is it greater than 10 per cent?
3. Average return on equity. Is it greater than 14 per cent?
4. Average diluted earnings per share growth. Is it greater than 9 per cent?
5. One year diluted earning per share growth. Is it greater than the average diluted earnings per share growth?
6. Debt to equity ratio. Is it lower than 70 per cent?
7. Interest cover. Is it greater than three or is it less than zero?
8. Price earnings growth. Is it less than one?
9. Return on capital. Is it greater than 3 per cent?
10. Market capitilisation? Is its capitalisation greater than AUD$100million?
11. Share price. Is it rising? Is it above the 60 day moving average? ** technical indicator??

With stock screening software you would be able to compute this criteria and have a list generated that could then have stocks selected from it for long term investing. That's the idea anyway.

I'm thinking that my long term portfolio strategy would include fundamental analysis (to short list undervalued shares with potential for growth and passive income) and use technical analysis for entry and exit of the stock to maximise capital growth of the portfolio and not solely focus on passive income. The stock would be held whilst trending upwards and sold when trending downwards (follows the logic of let the winners run and sell the losers).

I look forward to hearing your thoughts on the above criteria. I'm still in the research and strategy development phase for my long term portfolio strategy and would appreciate any comments/experience in this aspect of strategy development.

Thank you

Mr Editor · 26 October 2011

Nortorious said:
Hi All,

I have been reading Julian Dawson's book titled "Wealth Wisdom".

In his book, Julian identifies some selection criteria using fundamental analysis. I'm still learning fundamental analysis techniques and am hoping that the more experienced investors here might be able to critique the criteria that the author identified for short listing stocks for long term investment (with capital growth and passive income as the objectives).

The author uses the criteria below for short listing stocks (refers to this as his objective analysis) and then uses subjective reasons for finalising stocks to invest in.

1. Average dividend per share growth. Is it greater than 7 per cent?
2. Average revenue growth. Is it greater than 10 per cent?
3. Average return on equity. Is it greater than 14 per cent?
4. Average diluted earnings per share growth. Is it greater than 9 per cent?
5. One year diluted earning per share growth. Is it greater than the average diluted earnings per share growth?
6. Debt to equity ratio. Is it lower than 70 per cent?
7. Interest cover. Is it greater than three or is it less than zero?
8. Price earnings growth. Is it less than one?
9. Return on capital. Is it greater than 3 per cent?
10. Market capitilisation? Is its capitalisation greater than AUD$100million?
11. Share price. Is it rising? Is it above the 60 day moving average? ** technical indicator??

With stock screening software you would be able to compute this criteria and have a list generated that could then have stocks selected from it for long term investing. That's the idea anyway.

I'm thinking that my long term portfolio strategy would include fundamental analysis (to short list undervalued shares with potential for growth and passive income) and use technical analysis for entry and exit of the stock to maximise capital growth of the portfolio and not solely focus on passive income. The stock would be held whilst trending upwards and sold when trending downwards (follows the logic of let the winners run and sell the losers).

I look forward to hearing your thoughts on the above criteria. I'm still in the research and strategy development phase for my long term portfolio strategy and would appreciate any comments/experience in this aspect of strategy development.

Thank you

You seem to have the right framework in mind for your strategy: your use of fundamental and technical analysis seems to be a good fusion of these two schools of thought. Despite this, I disagree with a number of conventions put forward by Julian Dawson as they would have prevented me from owning a few of my greatest-returning investments.

One matter which you appear to be mistaken with is the idea that once your strategy is laid out, then you should be set. I've been a stock market investor for many years and am still continuing to perfect my strategy. Your approach to investing shouldn't be a "set-and-forget" matter; but rather mistakes, successes and countless investment books will constantly change and ultimately improve your investment philosophy.

Nortorious · 27 October 2011

Mr Editor said:
You seem to have the right framework in mind for your strategy: your use of fundamental and technical analysis seems to be a good fusion of these two schools of thought. Despite this, I disagree with a number of conventions put forward by Julian Dawson as they would have prevented me from owning a few of my greatest-returning investments.

One matter which you appear to be mistaken with is the idea that once your strategy is laid out, then you should be set. I've been a stock market investor for many years and am still continuing to perfect my strategy. Your approach to investing shouldn't be a "set-and-forget" matter; but rather mistakes, successes and countless investment books will constantly change and ultimately improve your investment philosophy.

Thanks Mr Editor, I appreciate you taking the time to reply to my post.

I agree that a "set and forget" strategy is not appropriate for my style of investing or the current environment. Whilst others were successful with a set and forget strategy during the bull market, they were smashed when the GFC hit and the current turbulent market.

My strategy will be more a "set and monitor" relying on technicals for exit points (and monitoring fundamentals for significant changes that would start a down trend). In order to try and maximise capital growth.

Strategy development as you have said will be an ongoing process. I will continue to further my knowledge and understanding through reading and active investment.

I plan to record my thoughts, feelings and understanding of situations in an "Investment Journal" so I can actively monitor the psychological aspect of investments and reflect on my decision making processes and what impacts my behaviour. I'm hope this will assist in improving my self awareness in this discipline.

Thanks again for your contribution!

Fundamental Analysis Criteria

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Fundamental Analysis Criteria

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