We all know the names Warren Buffett, Peter Lynch, and Benjamin Graham.
But what is it they all have in common?
Besides the fact they all became quite wealthy, not one of them ever used technical analysis to guide their investing decisions. In fact, Buffett once noted, “I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer."
Lynch observed, "Charts are great for predicting the past."
Instead, they relied on fundamental analysis to build their famous fortunes, much like we do at The Cheap Investor. Just like each of those well-known investors, with each trade we monitor, we’re looking for:
- Competitive advantage
- Earnings growth
- Sales revenue growth
- Quality of the company's management
While there’s more than one way to analyze a stock, when it comes to long-term investing, we think one of the best ways is with fundamental analysis.
And Warren Buffet agrees.
In 1988, after studying the nuts and bolts of Coke (KO), he bought more than a billion dollars worth of stock. That’s because he saw consistent performance, good long-term prospects, and a bargain in the stock price after years of disaster. The stock, said Buffett, wasn’t reflective of the growth set to occur in the company’s international business.
He saw a bargain, while others ignored the opportunity.
Shortly after, he would make a fortune, as Coke exploded.
Or, take a look at our September 2016 recommendation on Diversified Restaurant Holdings (SAUC) at just $1.20 a share. After falling from a recent high of $1.90 at the time, we saw a bargain and made our recommendation. Yet, others ignored it, missing the opportunity.
Sure, the stock had fallen on hard times, but its numbers were improving. In fact, in the second quarter of 2016, it posted a net loss of only $182,426, a nice improvement from the second quarter of 2015 when it lost $3.3 million.
For the six-month period in 2016, SAUC posted net income of $247,979, a great improvement from a loss of $3.05 million in 2015.
We noted in that recommendation, “if the company continues to increase its revenues and earnings, we think the stock could move 50 to 100% from this low point”.
It did better than that, hitting a recent high of $2.65 for a potential gain of 121% in six months.
Simply by paying close attention to the nuts and bolts of a company, savvy investors can reap nice profits. Just ask Warren Buffett. He’s now worth $73.1 billion because he pays very close attention to fundamentals, just as we do in The Cheap Investor.