Combining Fundamental Analysis With Seasonality Analysis
The following report summarizes:
Fundamental analysis reports are an important tool when determining the feasibility of a seasonal trade. Most fundamental analyst reports include “nuggets” of information that are useful for timely investing. The job of the seasonality analyst is to identify the “nuggets”. Unfortunately, finding “nuggets” in most research reports is like finding a “needle in the hay stack”. The investor must read through a lot of “chaff” before the truly valuable information is found.
Useful information from fundamental analyst research reports is obtained by examining comments about future events. Equities and Exchange Traded Funds respond to anticipation of a series of future news events including launch of new products and services, exploration and development activity, earnings momentum, revenue momentum and potential dividend increases. The seasonality analyst particularly focuses on future events mentioned by fundamental analysts that are known to recur on an annual basis.
Information from fundamental research reports about earnings leverage is very useful. Analysts frequently estimate the impact on earnings and cash flow triggered by a change in the price of a product or service. Also, they frequently estimate the impact on earnings of new products and services that are about to come on stream.
Information from fundamental research reports based on past data is useless and should be disregarded. Valuing companies based on historic earnings growth, historic revenue growth, book value, historic dividend yield and historic dividend payout ratios is useless. Unfortunately, fundamental research reports frequently are “loaded” with useless historic information.
Tech Talk does not like using “absolutes” such as NEVER and ALWAYS when making statements about investment strategy. The exceptions are as follows:
Comments from fundamental research reports about the future also have their limitations. Fundamental analysts frequently are required by institutional investors to provide corporate models projecting results for the next three to five years. However, the market rarely gives significant value to an equity investment based on prospects beyond the next six quarters. Fundamental analysts have enough difficulty determining earnings and revenues for the next quarter let alone the next three to five years. Most projections beyond the next six quarters assume continuation of current market conditions. Market events, that could cause a significant divergence in projections, frequently are not included in their models.
Fundamental analysts generally are bright people who go through an extensive (and sometimes onerous) process to become an analyst. One of the virtual requirements to become a fundamental analyst is to earn a Chartered Financial Analyst (CFA) designation. The designation is earned by completing three “grueling” exams usually over a three to five year period. Studies for the CFA designation focus on value analysis and portfolio management. Technical analysis is mentioned briefly. Seasonality analysis is rarely mentioned.
Some fundamental analysts are better than others. Top fundamental analysts are “worth their weight in gold” and receive the appropriate yearend bonus. Top analysts frequently are people who have at least ten years of experience in the investment industry. They have built a reputation for knowing their companies and, most important, knowing how share prices in their sectors respond. Most fundamental analysts know their companies very well. Fewer have a reputation for knowing how share prices in their sectors respond relative to overall equity market conditions.
Comments by “ranked”
analyst usually are valuable. Most analysts are ranked by outside
“independent” surveys. Most investment firms pay special bonuses to fundamental
analysts who make the “ranked” list in surveys. The top two ranked analysts in
a sector are the most valued. Their opinions are sought the most by
institutional investors before making investment decisions. Several analyst
ranking surveys are conducted in the
A few fundamental
analysts (frequently with a high rank in their sector) are students of
seasonality analysis and use seasonality as one of the factors that influence
their recommendations. The classic example is a ranked analyst in the
Several “seasoned” fundamental
estimates offered by fundamental analysts are useful. Free consensus
earnings estimates for individual companies are available from several reliable
sources. www.globeinvestor.com provides
Tech Talk normally published consensus estimate data for the TSX 60 companies and the Dow Jones Industrial Average 30 companies on two occasions per quarter: Approximately six weeks after the end of a quarter when most quarterly results have been released and two weeks before the end of the quarter when most corporations enter into a “quiet” period. During the quiet period just prior to release of quarterly earnings, corporations rarely issue statement that will impact earnings projections unless an earnings warning is involved. Accordingly, consensus estimates remain relatively stable from two weeks before the end of the quarter to release of quarterly results.
The best sources for
information on future events are free and come from readily available sources:
corporate conference calls following release of quarterly reports, quarterly
reports, annual reports, SEC reports and statements at annual meetings. Most
corporate statements are readily available either from the company, corporate
web sites or publicly available websites (e.g. EDGAR in the
effectiveness of fundamental analysis has diminished in recent years. In
Tech Talk’s opinion, laws have changed inrecent years to the detriment of
investors. Prior to Full Disclosure (Regulation FD) legislation in the
To be fair, some fundamental analysts do go the extra mile. They check supply channels and question competitors to confirm validity of their estimates. However, this type of analysis requires a substantial amount of “leg work” and time. Many fundamental analysts do not have the time or resources to do “extra curricular” analysis on a consistent basis.