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Mining the wealth of fundamental data

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The old saw about the difficulty of finding a needle in a haystack could apply to the task of using fundamental analysis to focus on attractive investment opportunities. Daily news, mandated financial reports, and investment opinions create torrents of information about every possible alternative. Careful analysis of standardized investment intelligence can help you focus on actionable nuggets of information that could help you reach your investment goals.

One widely used tool used by investment professionals is Standard & Poor’s Compustat database. This industry-leading source of market intelligence offers profiles on publicly traded companies that are based on comprehensive financial data and thoroughly standardized statistics. These objective profiles facilitate meaningful comparisons, and they set the stage for personalized, in-depth explorations.

Stock screeners help to sift for information

A company may be defined by any number of individual statistics. But investment opportunities may be more likely to be identified by patterns and combinations rather than individual numbers. The amounts of revenue or net income, for example, do little without the context for those numbers. Stock screeners allow you to find only those firms that meet your full list of criteria, which makes the standardized Compustat database a powerful screening resource.

Use the Fidelity screening tool to identify companies that meet your financial standards, price performance and volatility objectives, and technical perspectives. You can further sift to find only companies that meet sector, industry, and style criteria.

The Fidelity screening tool allows you to build your own screen from scratch. You can also use professionally designed templates and customize them to fit your special requirements. Standardized data from Compustat will inform all the screens you execute.

Benchmarking eases comparative evaluation

Understanding how a company might compare with its peers, competitors, and investment alternatives can be an important element of decision making. Each S&P Compustat Company report tells you how the company’s overall size and total revenue rank within its business sector, industry group, industry, and subindustry. Each report also shows you how the company’s stock market price-to-earnings valuation compares with its competitive peers. And it illustrates detailed valuation comparisons such as price-to-book and price-to-sales ratios along with management effectiveness rankings such as returns on assets and returns on equity and profitability measures such as gross margin. Many of the comparisons also include sector, industry, and subindustry rankings. All of these calculations are derived using standardized Compustat data to help assure that comparisons are made on a like-against-like basis.

Beyond the company portraits, many of the same benchmarks can be used as part of the screening process to distinguish potentially leading or lagging companies and to highlight companies with potential changes in the momentum of specific characteristics.

Do you want to create a niche benchmark to fit your own investment process? You can use the screening tool to identify the group of companies you’d like to include in your benchmark universe, then find the metrics that you like to use to create your benchmark.

Monitor company news and events

Evaluating the context of an investment opportunity may often be an important aspect of understanding its overall potential. Each company profile web page includes a list of recent news and announcements involving the company; every time you open the page, the list refreshes.

If you would like to monitor news more actively, you can create a watch list and email alert process to keep yourself informed even when you are not logged in. You can add and remove companies from this process as your interests change.

Enhancing your analytical insights with third-party evaluations

Market professionals often use third-party evaluations of specific company attributes to supplement the fundamental insights from financial performance and market trends. Here are some of the factors routinely considered alongside Compustat company reports:

  • Environmental, social, and governance (ESG) summary

    Companies are often held accountable for nonfinancial issues such as their performance with pollution control and natural resource protection and their engagement with social issues. GMI's rating methodology is designed to identify risks most likely to affect equity valuations. Specifically, ratings reflect actual corporate behaviors rather than policies or affirmations of intent to adhere to best ESG practices. GMI assigns context-sensitive relative weightings to our key metrics, based on market, regional, ownership or sector differences. Individual company scores are then a Red, Yellow or Green flag for each ESG category (Environmental, Social and Governance) and an overall ESG rating. The company’s ratings are then compared to the ratings within the industry where the stock resides.

  • Accounting and governance risk

    A company makes many judgment calls about its accounting. Few individual decisions may be critical, but investors have learned the need to watch for patterns that may indicate potential issues. The GMI Accounting and Governance Risk (AGR®) Score & Rating is widely recognized as an indicator of the confidence level surrounding a company's management and reported financials. It is based on analyses of financial reporting and governance practices at more than 8,000 North American-based publicly traded companies.

Past performance may not assure future results. But a careful fundamental evaluation using objective data can provide actionable insights to guide decision making.

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Article copyright 2014 by Wealth Management Systems Inc. Reprinted with permission from Wealth Management Systems Inc. The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.