How do you know if a stock is fundamentally strong?

While analysing which stocks to invest in, it is important for retail investors to consider both fundamental and technical analysis of the stock. The CANSLIM investment methodology, devised by our founder, William J. O’Neil, does exactly that. While both these aspects are extremely important, here, we will focus mainly on the fundamental analysis of stocks.

1. Earning’s (Both annual and current quarterly earnings)

A growth of at least 25% for the last two quarters and a growth of at least 25% for each of the past 3-5 years, is a good sign. Our research shows that earnings growth is the no.1 indicator of a stock’s potential to make big gains. That’s why it is important to look for stocks with strong current results, as well as a history of solid earnings growth. Also watch for quarterly sales and profit margins that are growing. Further, a return on equity (ROE) of above 17%, is a good indication that the stock will breakout soon.

Bajaj Finance’s stock price surged 227% in 52 weeks starting in January 2012. During the five quarters before this big move, Bajaj Finance offered clues it would become a winner when it reported quarterly earnings growth of 180%, 182%, 94%, 65%, and 57%. Conventional wisdom said those earnings gains were already priced into the stock and it was too late to buy. But Bajaj Finance was just gearing up. And was Bajaj Finance unusual? Not at all. Stock prices surged in the upcoming months.

2. New Factors

Look for companies with new products, new services, new management or even new price highs. New conditions in the industry as a whole could also be a positive sign for those particular stocks. Explosive stock growth doesn’t happen by accident. The biggest stock winners had some new factors associated with the company, that propelled the company to astounding heights. That’s why it’s important to look for the new angle in a company. New products ignite growth.

Indraprastha Gas is the sole supplier of CNG in Delhi. The Company is a huge beneficiary of strict regulations imposed by both Delhi Government and the Supreme Court of India to curb pollution in the city. The ban on diesel driven public transport vehicles in NCR, coupled with the Delhi Government’s odd-even rule has led to a surge in demand for CNG in the region. CNG accounts for almost 76% of the Company’s sales volume. Since then, the stock has shot up over 100%.

Many people are of the opinion that various factors need to be considered while performing the fundamental analyses of stocks. However, our research shows that the above mentioned points are the most important factors and account for the major dependency of stock prices on fundamental factors. For more fundamental analysis tools and technical analysis tools, visit www.marketsmithindia.com.

For 50 years, our founder William J. O'Neil has been educating United States investors on how to make money in the stock market. His investing classic "How to Make Money in Stocks" has sold more than 2 million copies worldwide. Now, for the first time, we're expanding outside the U.S. to offer an application focused on the India market. Our goal is to educate you in a fun and engaging manner and help you become a better investor.

More features will be coming soon. We want your feedback! Our goal is to be the best investing app for India. Please send any comments or suggestions by tapping the Feedback button in the app. You can also reach us at : marketsmithindia@williamoneilindia.com.

MarketSmith India is an investment advisory product based on William O’Neil’s Can Slim method with model portfolio, pattern recognition, idea lists powered by institutional quality data