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Fundamental Analysis Reference Guide

©2015 TD Ameritrade IP Company, Inc., All rights reserved. Terms of use apply. FUNDAMENTAL ANALYSIS

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© 2015 TD Ameritrade IP Company, Inc. All rights reserved. 08/2015

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©2015 TD Ameritrade IP Company, Inc., All rights reserved. Terms of use apply FUNDAMENTAL ANALYSIS

WELCOME

Welcome to the Fundamental Analysis workshop, where we teach strategies that are designed to help you evaluate potential investments based on fundamental, company-specific data. This is a crucial step to furthering your investor education.

In this workshop, you will formulate investing plans that will help you evaluate a company’s financial strength. As the workshop progresses, you’ll learn to contrast the major approaches to fundamental investing and implement them into your individual investment plans. Fundamental investing involves proper market timing and an awareness of the economic cycle stages to facilitate preferable entry and exit timing.

After learning the basic concepts of fundamental investing, you will discover how to use features within the Investor Toolbox® to review analyst earnings estimates and key financial ratios to identify stocks that meet your investment goals.

To help you continue your learning after the workshop, you will also have access to the Fundamental Analysis online course. It contains more detail, videos and examples of the concepts taught in the workshop.


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To become a proficient fundamental investor, you need not be an economist; however, you do need to stay informed. Macroeconomics is the study of the economy as a whole and helps investors understand how economic information can affect their investments.

Knowing how one piece of macroeconomic data fits into the bigger market picture can be challenging, but just as with any other discipline, it becomes easier the more it is done. Well-versed investors should be aware of major economic reports on the Investor Toolbox®. In addition, it is important to remember that the top-down analysis method you learned in the Stock Investing course still applies when searching for fundamentally strong stocks.

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Boom-to-bust cycles have always been a part of the economy. For investing purposes, it is useful to identify the economic cycle’s phases and implications. It is divided into six parts: early, middle and late expansion and early, middle and late contraction.

The strength of the overall economy is commonly measured using gross domestic product (GDP). A country’s GDP measures its economic output. As the GDP changes, so does national employment, productivity and interest rates. This helps investors track and forecast economic expansions and contractions, which can lead investors to which sectors are likely to be most active during a given part of the cycle.

Students looking for a quick review of major fundamental reports can find summaries in the Market Analysis Charts section of the Long-Term Investing tab. In addition students looking for more detailed reports can use the News section of the Investor Toolbox®, which contains the entire Economic Calendar.

An understanding of the economic cycle my help students anticipate which sectors are poised to rotate into or out of favor with institutional investors. While the information here is more of a guideline than a hard a fast rule, it can help you identify sectors for potential investments.


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In this course we outline three primary investing styles for fundamental investing: value, growth and income.

VALUE INVESTORS

Value investors are commonly attracted to stocks that are lower than they may have been in the past and that analysts currently have low expectations for. Value stocks can sometimes have lower sales and earnings that result in cheaply priced stocks relative to their intrinsic value.

GROWTH INVESTORS

Growth investors are attracted to stocks that analysts currently have high expectations for. Growth investors expect higher sales and earnings to result in stocks that continue to trade higher and will continue to be favored by institutions.

INCOME INVESTORS

Income investors usually focus on large, stable companies that produce consistent and/or growing dividends for their investors.

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Value investors are optimists who look to purchase stocks that are undervalued in comparison to their intrinsic values. These companies typically have strong balance sheets but, for one reason or another, are currently trading far below expectations. Value investors may find potential investments in stocks that have recently significantly missed analyst expectations, released negative news or are otherwise out of favor in the economic cycle.

For example, value investors may have purchased financial stocks at the height of the financial crisis of 2008. And many may have also likely purchased shares of BP after its stock price severely dropped as a result of the Gulf Coast oil spill of 2010. The dangers in value investing, however, are investing too early in the downtrend or investing in a company that ultimately never recovers. For example, value investors who purchased shares of Bear Sterns with the anticipation that it would survive the 2008 recession likely experienced losses because the company never recovered.


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As the name implies, growth investors look for stocks that are currently growing. Growth companies are typically found in sectors that are currently in favor due to the economic cycle. A growth investor is looking to catch upward momentum on stocks popular with institutions.

An example of a growth stock throughout 2009-2011 was Apple Inc. During this time, Apple released numerous new products and its stock continued to rise. Although a growth investor may have only captured a portion of the total return a long-term value investor realized, it most likely did not take as long to generate a profit because the stock was already growing when purchased. One danger in growth investing, however, may be purchasing at the top of the trend, only to see your investment take losses.

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Income investing usually centers on large, stable companies that produce consistent and/or growing dividends for their investors. A dividend is money a company pays its stockholders as a benefit of being an owner in the company. The number of companies that pay dividends has shrunk considerably over the last 30 years.

Income investors look critically at the stability of these companies and prefer strong balance sheets. Income investors tend to take more of a “buy and hold” approach because they are more concerned about collecting the dividend than they are about increasing stock prices. It is important to note, however, that the losses from a poorly performing stock may quickly outpace any profits from dividends. This requires investors to continue monitoring the key fundamental characteristics that reflect company stability.


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While the value, growth and income investing styles recently overviewed have been presented separately up to this point, most investors follow a blend style of investing. There are two common blend investing styles that we will discuss in this course—growth and income and growth and value.

Growth and income investors seek mature companies with lower volatility that they can potentially hold for extended periods of time. These companies should also provide steady growth through consistent dividends alongside rising share prices. The acronym GARP stands for Growth At a Reasonable Price. This blend investing style combines growth and value philosophies. While these might seem contradictory, growth and value characteristics can be present at the same time.

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Perhaps the largest expected driver of stock prices is Earnings Per Share (EPS). Generally the more money a company earns, the more the market will pay for its stock. However, the price the market is willing to pay for a company’s earnings is influenced more by its perceived earnings potential than by actual posted (historical) earnings. Also the availability of greater returns and/or lower risk in competing financial markets can cause investors to invest elsewhere.

These earnings expectations are derived from two sources: Wall Street analysts, who publish earnings estimates and recommendations for companies they have been assigned to follow, and institutional investors, who employ analysts to make projections of company earnings.

Many investors believe that the analysts’ earnings estimates hold more value than analysts’ buy/sell recommendations and price targets. Often, price targets are considered to be the least reliable source of information an analyst delivers.


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The primary ingredient fueling consistent earnings growth is consistently growing profits. In general, earnings growth stems from one or a combination of the following:

1. Selling more goods and services

2. Raising prices

3. Selling new goods or services

4. Buying another company

You can use the Investor Toolbox® to locate strong companies by checking the quarterly or annual data on the Income Statement for consistent growing top line revenue and bottom line earnings.

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The EPS revisions that have had the most impact on stock prices have been those for the current fiscal year. Quarterly earnings estimates, while important, can be heavily influenced by “one-time factors,” “extraordinary items,” “non-recurring charges” or “seasonal influences.”

Revisions to earnings estimates can be a primary motivator for institutional money flow. Present stock prices reflect current EPS estimates. Mean changes to these EPS estimates often result in either accumulation of shares when positive or distribution when negative. Due to the often continued progression of EPS revisions as well as the size of institutional investment, there commonly is a continued reaction to estimate revisions. Smaller retail investors can take advantage of these delayed responses.

The Investor Toolbox® makes it easy to locate the mean changes to earning estimates. They are found within the Wall Street Estimates section of the Earnings Estimates page. You can also use prebuilt searches to find these stocks.

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©2015 TD Ameritrade IP Company, Inc., All rights reserved. Terms of use apply. FUNDAMENTAL ANALYSIS 12

Declaration Date is when a company’s board of directors announces its intention to pay a dividend on a certain date. The board will also release the Date of Record and the Date of Payment at this time.

Date of Record is the date at which investors must be shareholders to receive the dividend.

Date of Payment is when a company distributes its dividends to shareholders of record, also known as the “payable date.” This date usually comes after the Date of Record in order to give the company enough time to carry out the distribution process.

Ex-Dividend Date is typically set several business days (usually two) before the Date of Record to allow the exchanges the necessary clearing time associated with buying a stock. For those who have purchased before the Ex-Dividend Date, the dividend is theirs. For those who have bought shares on or after the Ex-Dividend Date, no dividend will be received.

The stock’s share price typically drops on the Ex-Dividend Date to compensate for the upcoming dividend. The stock price will usually fall by about the amount of the future dividend, which prevents investors from attempting to attain riskless profits.

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Certain market environments, industries, and investments types have historically paid higher dividends than others.

During down trending market environments, income investors may outperform growth and value investors. Also, established companies in many defensive industries pay dividends. These industries and income stocks can be more resistant to selling pressures than growth stocks in non-defensive industries. Finally, certain investment types such as utilities and Real Estate Investment Trusts (REITs) may have higher dividends as well.

The Market 360® tool allows investors to screen for dividend-paying income stock candidates within sectors and industry groups such as Financials, Utilities, Energy (Oil and Gas Storage and Transportation for MLPs), Telecommunications, and Consumer Staples groups.


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There are several pre-built searches on the InvestorToolbox® that can be used to find dividend-paying stocks. Mouse over the InvestorToolbox® tab and then click Strategy Searches. Locate the Investing Searches and click on the Archives link to the right. From there, a list of pre-built searches will appear. These searches use various fundamental criteria to help identify possible watchlist stocks for an income investing plan, a value investing plan, a blend of strategies such as growth & income, growth & value, and/or value & income.

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This list helps identify characteristics aligning with the Income Investing Plan on page 52. While the F/E score is displayed on the Corporate Snapshot page, the other characteristics are on the Financials page for a given company.

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Competition exists in every sector of the economy. However, companies with a “wide moat” are able to better fend off their competitors. A wide moat is denoted by the following characteristics:

Ability to produce at low cost – these companies can consequently either undercut their rivals to gain further market share or increase their profit margins.

Strong franchise or brand – this insulates businesses from competition. This attribute can also include a company that has such superior technology that its products are truly differentiated from competitors.

Barriers to entry – some companies enjoy favorable market positioning because they have few rivals. The ability to lock out competitors can result from high barriers to entry, meaning the cost of competing is too high for other companies to compete.

Recurring revenue streams – businesses such as utilities that supply electricity and water, i.e., produce a service that is always in public need.

A “network effect” – occurs when the value of a particular product or service increases for both existing and new customers as additional people use that same good or service.

Companies with a wide moat typically maintain strong values and growth in sales, EPS, free cash flow, book value per share, and return on invested capital.

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When considering a stock based on its fundamental financial strength, you may consider asking yourself the key questions presented on this slide. The answers should provide a better understanding of the potential security of your investment. By using ratios stemming from the data within the financial statements located on the Investor Toolbox®, you are able to address each question by using comparative analysis.

A simple example of ratio analysis could include comparing a company’s current stock price to its EPS, known as the P/E ratio. Ratio analysis can be extremely valuable when comparing a company to another company, an industry group or a benchmark. Additionally, the trends developing within the ratios themselves can help you gauge improving or deteriorating aspects of the business.

How can you tell when a company has a wide moat? Wide moats are determined by looking at the 10-year averages found in the Trend Analysis page of the Investor Toolbox® . When a company has double-digit growth rates, it typically has a wide moat.


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The valuation ratio that most investors first learn is the price-to-earnings (P/E) ratio. It is a valuable tool because it compares a stock’s price and earnings to that of another stock, industry group, benchmark or past history and tell investors how much they are paying for the company’s earnings.

The price/earnings to growth ratio (PEG) is calculated by taking the P/E ratio and dividing it by the expected annual growth rate in earnings over the next five years. PEG is a powerful ratio because it incorporates future expectations and gives us an idea if a high P/E ratio is justified.

The price-to-sales ratio (P/S) relates the stock’s price to the company’s sales revenues.

The price-to-book ratio (P/B) is calculated by dividing the current market price by a shareholder equity per share. The equity amount is what shareholders expect to receive if the company is liquidated.

It can also be helpful to compare specific ratios to an industry group average as well as the S&P 500 average, which can be found on the Investor Toolbox®.

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Investors use a variety of financial ratios to compare stocks. Using ratios, like the example ones provided, can help investors standardize and speed up their analysis.

The ratios in this table show the relationship of a stock’s trading price to factors such as past and expected earnings, sales, and book value. Follow along with the instructor as we use the table provided to compare two stocks.


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Profitability ratios are used to analyze how effective a business is being run. The higher the profitability ratio, the better.

Students may remember that return on equity (ROE) is a frequently used ratio that evaluates management’s effectiveness in running a business.

As with many ratios, ROE is best used when comparing similar companies or when making an industry group comparison.

Return on assets (ROA) is very similar to ROE but it removes the component of leverage from the calculation. In theory, two companies could have the same ROAs but dramatically different ROEs because of leverage.

Net profit margin is an excellent ratio for analyzing company profitability and operational efficiency. It tells an analyst how much money a company is making for every dollar in sales. A higher number means management is doing a better job of containing expenses and converting sales into earnings. However, because business models can vary dramatically, it is best to compare companies in the same group when analyzing net profit margins.

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Profitability ratios help analyze how effective a business is being run and help isolate factors that will likely to affect the future profitability of the company, and eventually the price of the stock.

Although there are many types of financial ratios, the ratios in this table help evaluate a company’s profitability on a variety of levels. Follow along with the instructor as we use the table provided to compare two stocks.

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DEBT/EQUITY

Debt/Equity is simply a reflection of how extensively management is choosing to finance company assets. A higher ratio means management is using more risk with financial leverage, which may also translate to greater rewards.

INTEREST COVERAGE

Interest Coverage is a useful liquidity ratio that helps investors better understand the capability of a company to service its debt.

CURRENT ASSETS/CURRENT LIABILITIES

Current Ratio shows how well a company can pay its bills that are due in the immediate future.

QUICK RATIO

Quick Ratio is frequently used when analyzing companies that have large inventories, such as retailers, and is useful during periods of slow sales to assess the company’s ability to meet near-term obligations.

(Current Assets - Inventory)/Current Liabilities

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Learning how to compare liquidity ratios can help you evaluate the financial strength of a company.

While the old adage “it takes money to make money” is often true with stocks, the level of debt and capability of a firm to handle their debt level should be a focus for the investor. Using liquidity ratios can assist in determining if a company is on solid footing.

Follow along with the instructor as he uses the table provided to compare the liquidity of some example stocks.


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With nearly limitless financial data, it’s easy to lose sight of your end goal —to simply determine a company’s financial fortitude. Rather than using all ratios in each situation, you should lean more heavily on the ratios that fit the investing style used. Limit your use of ratios so you can examine them in a meaningful way. Investors should focus on identifying the trends in the ratios. Are they getting stronger or weaker? Are they maintaining a given minimal standard over the 10-year period?

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Intrinsic valuation is a time-tested, fundamental analysis technique espoused by many famous investors. The purpose of an intrinsic valuation is to determine what a company’s “true” value is by using a company’s current stock price projected forward by encompassing the current value of all expected future earnings.

The Valuation Analysis tool on the Investor Toolbox® is a simplified version of a discounted cash flow model that incorporates an earnings projection. The Valuation Analysis tool is most commonly used by growth and value investors seeking to determine if a stock is trading at a deep discount relative to its intrinsic value.


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This idea of a margin of safety involves finding stocks that are trading significantly below their intrinsic values. This margin of safety is accounted for by choosing stocks with a projected price greater than the current stock price by at least 25 percent or more. Although investing with a margin of safety does not guarantee a successful investment, it does provide room for error in the projected variables listed above.

Many investors struggle with the concept of margin of safety because it requires them to separate a company’s value from its stock price. However, it is important to recognize that a declining share price accompanied by a stable intrinsic value implies less risk to the investor as the margin of safety increases.

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Next, we explore how to confirm that a stock is undervalued and attempt to determine a stock’s current and future values. Stocks move due to earnings growth, the expectation of future earnings growth and demand for alternative investments. All three of these inputs, as numbered on the example, are incorporated using the Valuation Analysis tool.

The Valuation Analysis tool is simple because only three inputs are used to calculate the projected price: projected growth rate, projected P/E ratio and the discount rate, also called the expected annualized rate of return.


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The projected growth rate is the same five-year estimate explored in the fundamental analysis section of the Stock Investing course. Earlier in the workshop you learned that analysts make projections for what the average annual earnings growth will be for the next five years.

The Valuation Analysis tool, however, uses the growth rate to project EPS over the next 10 years. This technique of using 10 years to project earnings works best for established, low-growth companies. The current analyst growth forecast is less effective for high-growth companies because they will likely have a difficult time maintaining the high rates. As companies grow, they will eventually reach a size where it’s very difficult for them to maintain their current growth rates.

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As a company grows, its ability to continually increase EPS becomes more difficult. If the expected growth rate is currently above 6 percent, factor in a reduction to estimated sustainable growth rates over a 10-year period. Using the table illustrated, can help you calculate an appropriate reduction.

Below are some examples to help walk you through the calculations:

Example 1: If Expected Growth Rate = 27%, the guidelines would call for a 15% growth-rate reduction and would change the projected growth rate input to 22.95% (27 x 0.85 = 22.95).

Example 2: If Expected Growth Rate = 45%, the guidelines would call for a 20% growth-rate reduction plus an extra 7.5% reduction to 32.63% (45 x 0.725 = 32.63).


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The Valuation Analysis tool on the Investor Toolbox® uses the Historical P/E ratio by default. For a company that has had high growth expectations in the past, the historical P/E ratio would be higher because investors were willing to pay more for each dollar of earnings in anticipation of higher earnings in the future. Often, the P/E ratio will decline as the company grows and has difficulty maintaining investor optimism and EPS growth. Over longer time frames, many companies with previously high P/E ratios wind up reverting back towards overall industry P/E ranges. A more conservative projected P/E to use would be the lower of the industry group P/E or historical P/E.

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The next component to consider when evaluating an investment would be competing investments that may offer higher and/or safer rates of return. As a result, a certain threshold rate is required in order for investors to choose the stock over competing investment alternatives.

The discount rate can be thought of as the rate of return investors require to be fairly compensated for the risk they are taking. If market returns are more uncertain, the risk of investing in the company’s stock is higher. This increased risk requires use of a higher discount rate. The terms “discount rate” and “expected annualized required rate of return” are interchangeable.

To calculate the Discount Rate, we need to first determine the market risk premium, risk-free investment return and the stock’s beta.


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Using the CAPM calculator enables you to find the risk-adjusted discount rate you should expect before purchasing a stock. As we learn about each component of the calculator, you will see how they help you find a minimum rate of return needed to be compensated for the risk you are taking by owing the stock rather than some other form of investment.

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Market risk premium is the extra return investors require to put capital into the risky equity market rather than Treasuries. The market risk premium normally fluctuates between 5 percent and 9 percent. In a more uncertain investing environment, investors will require a greater return to entice them from the safe harbor of government bonds into the unknown that is the equity market. The brighter the outlook for equities, the lower the market risk premium would be.

A simple way to gauge the market risk premium is to use the S&P 500 Volatility Index ($VIX). When the VIX is higher, investors tend to be more fearful, expect more volatility and will require greater compensation to remain in the equity market. When the VIX is lower, investors tend to be more confident, expect less volatility and won’t require as large of a return to remain invested in equities.


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The lower risk rate is what an investor could potentially earn by investing in a less risky asset. In reality there is no such thing as a riskless asset, but in the financial world, a proxy for this is the yield on long-term United States Treasury obligations. This lower risk rate can easily be found on Investools Online® by pulling up a chart of the 30-year Treasury bond yield ($TYX).

Assume the $TYX is at $39.40. The decimal is then moved one place to the left to convert this to a percent yield of 3.94 percent. The yield factors in expectations for future inflation and economic growth, providing a simple way to recognize these factors in the rate of return calculation.

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Beta is a coefficient that explains the historical relationship between a stock and the S&P 500. Beta can be positive or negative. A beta of one suggests the stock is extremely correlated with the S&P 500 and therefore experiences similar movement. An asset with a beta of zero means that its returns are independent of the market’s returns.

A positive beta means that the asset’s returns generally follow the market’s returns, in the sense that they both tend to be moving up or down together. A negative beta (rare to find these days) means that the asset’s returns generally move opposite the market’s returns: when one is up, the other is down.


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The Power ProSearchTM is a search engine that has been used to create each prebuilt search on the Investor Toolbox®. It also allows students to customize and save each search in order to locate companies that fit extremely specific criteria.

To get the most out of the search process, investors should recognize which investing style(s) they would like to emphasize. The Power ProSearch tool can easily be customized to quickly find companies possessing the specific attributes for each investing style via a simple four-step, menu-driven process.

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After completing the Stock Investing course students should be comfortable searching for growth stocks. However, now that you have a much deeper understanding of fundamental analysis, you should be able to expand your searching avenues.

Growth investing criteria generally involves sales, earnings and cash flow growth-measuring metrics, which can be combined to indicate a company’s fiscal health and potential ability to grow. In the table, you see a multitude of available criteria in the Power ProSearch that deal with growth metrics.


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Value investors commonly use Power ProSearch to scan for items relating to a company’s assets, earnings and sales compared to its current stock price. Building your own searches or customizing prebuilt searches already available on the Investor Toolbox® with criteria listed in the table will help you find potential value opportunities.

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Cash Flow Growth Rate 5 Years: The change in cash flow for the specified period. Values are expressed in percentage terms (e.g. 1=1%) with rising cash flow represented by positive numbers.

EPS Stability: Measures the steadiness, or consistency, in a company’s earnings growth rate over the past five years. Values range from 99.9 to 0.0 with scores of 99.9 representing low levels of volatility in the rate of earnings growth.

Sales Growth Rate 5 Years: The annualized percentage growth rate of the company´s sales. A high sales growth rate is a barometer of potential earnings growth.

Dividend Growth Rate 5 Years: The amount dividends have increased over the specified time frame. Values are expressed in percentage terms (e.g. 1=1%).

Stock Beta: A value of 1.0 suggest that a stock’s volatility is equal to that of the market. Values below 1.0 suggest less volatility, and values above 1.0 suggest more volatility.

Dividend Yield: The annualized dividend payment divided by the current stock price. Values are expressed in percentage terms (e.g. 1=1%).

Market Cap: Divides companies into four groups based on their market capitalization, which can be calculated as number of outstanding shares multiplied by stock price. In ProSearch, micro cap = 1; small cap = 2; mid cap = 3; and large cap = 4.


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Investors who would like to use a certain Power ProSearch fundamental criteria but aren’t sure where to set their high and low parameters in order to conduct an efficient and effective search can use the “Display Only” feature. The “Display Only” option in Power ProSearch allows you to identify ranges to use when establishing parameters for more refined searches.

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Assuming that there is a sufficient margin of safety, some value investors will use a basing pattern on a weekly or daily chart and build a position in the stock. Other investors, however, may simply wait for the stock to break out of the basing pattern before investing.

Waiting for the stock to break resistance and move out of its basing pattern could allow the investor to invest elsewhere, potentially more profitably, until the break occurs. This strategy of waiting for the breakout above resistance before investing could be a more efficient use of portfolio dollars.


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This is an example of a one-year chart where the downtrending red line represents a significant resistance area the stock has encountered in the past. Value investors may look for a breakout above this resistance to begin accumulating shares. They would then look to place a stop-loss order. You could choose to follow the same guidelines outlined in the Stock Investing course where you place the stop loss 3 percent below the moving average or support level.

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Value stocks may already be in an uptrend by the time you locate them for your watch list. Even though they are undervalued, it doesn’t mean you should automatically buy them. By using long-term moving averages for support entries, a value investor is able to look for entries that may help amplify the returns. In the example shown, you can see how technical entry points near the moving average would have increased the profitability of the investment.


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A fundamental investor places weight on factors like sales and earnings growth—these should be monitored closely for potential clues suggesting weakness. Possible clues include substantial estimate revisions made by analysts. An earnings result that misses expectations, known as a negative surprise, could be reason enough to sell the stock or at least a portion of it, even if the stop-loss order has not yet been triggered.

While stop-loss orders should protect against substantial losses, they aren’t fool-proof, and unexpected bad news events can result in stocks gapping down—and potentially right past—established stops. Therefore, selling part of a position when negative revisions take place could “lock in” potential profits before the stock’s sentiment completely changes.

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Stock trends will eventually change and all investors should monitor their investments. A break of a long-term support line may be an opportunity to exit the stock.


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The method for picking stocks you learned in the Stock Investing course follows the growth style. The same top-down analysis of looking for strong sectors and strong industry groups to then pick strong stocks still applies. You should now understand more fully what to look for in the fundamental data. The Investools Method® of using three green arrows employs technical indicators to signal entries on growth stocks. When a short-term moving averages crosses over a long-term moving average, it may also signal an entry point.

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All the principles about position sizing and money management you learned in the Stock Investing course still apply when considering exits on your growth stocks. Because a fundamental investor places weight on factors like sales and earnings growth, these should be monitored closely for potential clues suggesting weakness and the position should be re-evaluated and adjusted accordingly.

As mentioned previously, stop-loss orders attempt to protect against substantial losses; however, they aren’t fool-proof, and unexpected bad news can cause stocks to gap down right past your established stops. When negative revisions take place, some investors may “lock in” some of their potential profits before the stock’s sentiment changes completely.


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A break below a long-term support line may also be considered as an example of an exit from a growth stock. The hallmark of growth investing should be growing share prices, so when your stock is not growing, consider looking for other growth stocks. While value investors may find reasons to purchase the stock based on long-term future expectations of growth, growth investors should strongly consider exiting the trade and look for upward-trending growth stocks.

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An income investor should still look for stocks that are at least anticipated to move sideways or preferably up. Regardless of the dividend yield, an income investor still needs a thorough evaluation of the underlying stock before investing. The stock needs to pass income-oriented fundamental criteria and have a significant enough dividend to offset associated risks. If the dividend doesn’t offset the risk of owning a mediocre stock, the investor should look for other dividend-paying stocks to review.

Before investing in high-yielding dividend stocks, review the historical dividends to assess the likelihood of any cuts or raises to the dividend. For example, if a stock previously paid a 50¢ dividend each quarter and it recently lost half of its trading value due to bad news, the future security of your dividend may be in question. Reviewing the historical stock price and any changes in dividend payments as a result may help you gauge the company’s capacity to pay steady dividends regardless of stock price fluctuations.


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Knowing when to exit is almost more important than knowing when to enter. A exit at the right time means the difference between profits or losses. Having predefined rules that help you know when to exit a trade helps remove much of the emotion in trading. Each investor has a different appetite for risk and requirement for reward. Based on your personal investment goals use the exit strategy examples provided as a framework to help decide when to exit your trades.

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Congratulations on completing the Fundamental Analysis workshop. Take a few moments to review the concepts you just learned. And try not to feel overwhelmed if something is not completely clear. All the core information we just reviewed is also available in the online course, which was included in the purchase price of this workshop. The online course is a valuable educational resource and contains additional detailed explanations and examples beyond the outline we have in this guide. We hope you enjoyed the workshop and wish you continued success as you become a more educated investor.

©2015 TD Ameritrade IP Company, Inc., All rights reserved. Terms of use apply. 52FUNDAMENTAL ANALYSIS

53©2015 TD Ameritrade IP Company, Inc., All rights reserved. Terms of use apply. FUNDAMENTAL ANALYSIS

©2015 TD Ameritrade IP Company, Inc., All rights reserved. Terms of use apply. 54FUNDAMENTAL ANALYSIS


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Fundamental Analysis - Investools.comeducation.investools.com/content/onlineEducation/coursesV5/CFN/... · FUNDAMENTAL ANALYSIS ... remember that the top-down analysis method you