Are You Forgetting Fundamentals?

03/29/2013 8:30 am EST


Jim Farrish

Founder and CIO, Jim's Notes

Fundamental analysis is getting lost in today's fast-paced investing world, to the detriment of many investors, argues Jim Farrish.

Jim, there’s a lot of talk about the psychology of the stock market, and of course you have vast experience in that, especially in the trading arena. So do you see what’s happening today as...are people looking at the right things in order to determine whether the stock market is really going to reach that elusive 14,000—and stay there?

I guess in some ways the answer is yes, and in some ways the answer is no. Perfect psychological answer, right?

I think what people are missing is that we’ve gotten so technical-oriented, with trend lines, patterns, MACD, stochastics, all of these things on the technical side that people really have forgotten about fundamental analysis. And I think Wall Street is still very good at the fundamentals.

The individual investor is just, "Oh, it takes too much time," but big groups like AAII have really kind of—that was their cornerstone, was to teach people about how to do fundamental analysis, and I think that’s a missing element in today’s market. I think you need both, and I think that’s hurt people on how they see stocks.

Yeah, I think a lot of people don’t pay any attention to fundamental analysis anymore.

It’s a shame, because I was teaching a class and we were talking about Bank of America (BAC), and people say, "I hate this stock." Why do you hate it?

Oh, there are charts, this, that, volumes, but you’ve got to look at the balance sheet of Bank of America. What is it doing? Is it improving or is it not improving? How are their loan provision writeoffs? All of the things that you and I used to study in our infancy in this business.

Bank of America is actually one of the better stocks. You get the loans, which they’re starting to do, or the lawsuits out of the way, which they’re starting to do, and it becomes very attractive, and we could go through stock after stock.

We were talking about Apple (AAPL) earlier. Think about ten times earnings...and people don’t like it.

Exactly, I know. I’ve seen a lot of really low P/Es today, even though the market has gotten much higher. There are still pockets out there where you could still get a pretty good bargain.

What's interesting to me is that at current earnings, the S&P is trading slightly below 14 times earnings. That’s cheap.

Right, and what’s the historical average?


13.5%. So right there we are; we’re certainly not overblown.

See? That’s why I’ve heard a lot of analysts on different networks and in different writings going oh, it’s overbought. What does that mean?

Overbought to me means that supply and demand is out of whack. That’s like the oil business; if you don’t have enough supply and you’ve got more demand, then it’s overbought. So the challenge becomes overbought doesn’t mean anything to me about the market. It’s looking at whether or not I can make money in the stock—because bottom line, that’s what we’re all trying to do.

Right. How much credence do you give to a company that has a lot of debt? Is that a factor that you think about if you’re buying—not necessarily trading, but actually investing in a stock?

Oh absolutely. I think that a company like Apple that has no debt, to me, is much more attractive than when you look at certain companies that have 150 or 500 times debt out there. It doesn’t work for me. Heavy debt—that’s like you and I as a consumer. If we have a lot of debt, what’s our buying power?

Exactly, zilch.

You can’t expand.

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