I discussed fundamental analysis previously. But where do these numbers come from. It can all be explained in one word, GROWTH. The reason why one stock trades more expensively than the other is that it grows faster than the other. Having the ability to see changes in management, merges and acquisitions, release of new products, and change in the competition before they happen will lead to large rewards. Consequently, if you are able to predict the future of a company’s growth then, you are able to forecast large moves before they actually happen (sounds easier than it is).
So how do you find the growth of a company? Easy, just check any finance website and look at their quotes, and examine their previous growth, because, it is a good indication of where they will be in the future. However, that is just a starting point.
But, here is where I believe the concept of value, price, worth of a stock mimics betting.
Here is an example. Say you want to make a bet on a basketball game, the Miami Heat versus the La Clippers. Now, usually, in any wager there is a team that is “favored” to win, the Heat, and then there is the underdog, the LA Clippers. Now in order to bet for the favoring team, you must give a certain number of points that the favoring team is going to win buy to secure a bet, the spread. Now the multiple is considered on wall street as the spread between winners and losers. Ultimately, you have to pay a higher price for growth on Wall Street just as you expect to give points to the LA Clippers on a basketball game.
Here is where it gets interesting. Often times, financial analysts may describe as company as undervalued. For instance, say the the bookies say that the LA Clippers are not as good as the Miami Heat, because, the Heat have Lebron James, and Dwayne Wade. But they overlook, the fact that the LA Clippers now have Chris Paul, and state the Miami Heat have to win by “50 points” to make a wager. Of course, you would want to wager on the Clippers, because they are undervalued. This occurs all the time in the stock market, companies are under valued, under appreciated, while others are over rated. It is your job to find those companies that are under valued!
Your fundamental analysis should hone in on companies that are less well known, and smaller markets, and young growth companies. There is more risk with these companies, but the rewards far outweigh an over valued company. Just like Public Enemy once said, “Don’t Believe The Hype”