Fundamental Analysis Vs Technical Analysis

  • What are the main differences in fundamental analysis versus technical analysis
  • An explanation of the timeframe required and terminologies used.
  • How Apple’s analysis panned out.

Fundamental analysis is employed to find the intrinsic value of a stock by looking at the macroeconomic factors, industry specific factors and finally the company specific factors. Technical Analysis on the other hand does not care about the “value” of a stock or the financial instrument. Technical analysis looks at the price movements and by using charts and other tools it helps to make profit on the trends shown. Both stock analysis methods are used to find top stocks for investments or trading and profit from the trade.

Fundamental And Technical Analysis: Major Differences

A major difference between both the stock analysis methods is the time frame over which they are conducted. Fundamental analysis looks at a company’s balance sheet, cash flow statement and income statement whereas technical analysts believe that all the available information is already priced in which leaves further analysis about the financial information superfluous.

Fundamental analysts read the quarterly statements which are released quarterly and hence have to look at a longer time frame of a couple months or years to see how the company is performing. Technical analysts simply look at the price and volume fluctuations which can be done on a weekly, daily or even minute by minute basis. Hence any investment through fundamental analysis would be a longer term commitment whereas technical analysts are known to close their trades within a week.

Differences In Terminology

The difference in timeframe has also given different terms to how market views their work. A fundamental analyst would generally recommend an “investment” for a given stock after thorough investigation and for a period of at least couple of months to several years. A technical analyst after going through the charts and other tools can give recommendation for a “trade” in a particular instrument. Although the end objective of both the investment or trade is to profit from the mispricing of the underlying instrument, both are done in a completely different manner with a different time horizon.

Flaws With Both These Stock Analysis Methods

Most of the fundamental analysts who have been covering a given sector for a long time end up getting close to the management. Most of the analysis is based on the information received from the company itself which allows the company to reduce the impact of any negative news and to promote the management viewpoint. Only buy-side analysts who work for money managers and mutual funds venture outside the numbers put forth by the company and look at external data.

Another flaw with fundamental analysis is that many analysts end up becoming stubbornly bullish for the stock thinking that it is the only top stock. During the dot com burst this characteristic was clearly seen.

Technical analysis on the other hand is considered as a superstition or black magic by some where the instrument’s features are not taken into account and the tools are made only on the movements of the price. After transaction costs and other associated costs there are few traders who are able to make sizable profits. A huge amount of trading is also taken up by algorithmic trading systems which have reduced the day to day monitoring in technical analysis.

Technology Stock Analysis

It is not easy to do fundamental analysis of tech stocks. To begin with most companies are not even profitable at the time they go public. An ideal example would be that of a value stock like Apple (NASDAQ:AAPL) which faced wild swings in its stock price in 2012 and 2013. After reaching a high of over $100 per share in September 2012 (split adjusted) the Apple stock fell by over 45% in a span of six months. During September 2012, the analyst consensus was that Apple was a top stock which has a good momentum, allowing it to reach $130-$150 per share (split adjusted) in a year. After getting clobbered at the Wall Street for over a year, the consensus estimate for the analyst had gone southward to a range of $55-$70 per share by September 2013 with many advocating a “Hold” or “Sell” rating.

These Apple stock price movements were a reaction to competitors like Samsung gaining market share, lower tablet sales and above all lower growth potential from higher revenue base. However Apple saw a complete reversal of fortunes from that quarter and has seen a continuous rise to over $110 (as of January 2015). The current mean rating from 43 different sources is $123.51 with an average of “Buy” rating.

Fig: Apple Stock movement in the last year

Apple is currently seen as a good value stock with decent dividend yield and huge cash with the company which the management is trying to return to the company in an efficient manner.

Putting together the pieces of the puzzle

Finally, it is difficult to point towards the ideal source for making judicious decisions. The final method used in the stock analysis depends on the motive of the investor. Legendary value investors like Graham and Buffett always advocated investing in companies with sound financials and business models after doing complete analysis for the firm. On the other hand people who are investing for shorter time horizons can gain by using the technical charts and profiting from the trends. However either way a huge amount of effort and analysis has to be done in order to ensure profitable decisions are made.

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