Be Prepared

This chapter presents a fundamental analysis for stocks. Fundamental analysis is more likely to be based on a uniform standard, which makes it easier for investors to understand the results. Fundamental and technical analyses are not alike, but there is a growing trend to combine both forms of valuation. In fundamental analysis, the P/E ratio is the indicator most often used. It indicates the multiples of earnings represented in the current price. The indicator has a major flaw and it tends to distort if and when the current information and the cycles of an industry have changed since the latest earnings report. In spite of this, the P/E ratio has remained a popular and decisive indicator used by many analysts for valuing stocks. Investors have a tendency to overvalue stocks by pushing their prices to extreme levels, especially when such stocks are in hot demand for one reason or another.