Fundamental Analysis - Bottom Up Approach

Using a "Bottom Up" approach for fundamental analysis means beginning your analysis on a microeconomic level right from the start, typically starting with a particular company itself.

You would then move to consecutive wider economic levels until you reach global economic analysis.

This contrasts with my previous article Fundamental Analysis Using a Top Down Approach, which starts out as wide as possible and narrows down to a specific company.

When doing any type of fundamental analysis, one of your goals is to look at how different factors affect performance at each of the specific levels being analyzed.

This article will provide some examples of these different factors focusing on using a "Bottom Up" approach to fundamental analysis. It will also focus on looking for companies that are doing well to help identify good stocks to purchase for a long position.

For people looking for good shorting opportunities you would obviously look for areas that are, or are expected to do poorly in the future.

  • Specific Business Level: Take a look at potential individual businesses that you may be familiar with or may be showing signs of good potential investments. We'll use Microsoft as our example.
  • Industry Level: Taking one step further, look at the industry in which your individual stock belongs to. Microsoft belongs to the "Application Software" Industry.
  • Sector Level: Next, take a look at how the sector in which this Industry belongs is doing in general. The Application Software Industry belongs to the Technology Sector.
  • Local Economy: Looking at the local economy would be analyzing a specific country or even region. Many times due to fluctuations in currencies, employment, government stimulus and taxation issues among other things, specific countries may be doing better economically than others. Particularly when considering whether to invest in or not.
  • Global Economy: Finally, if the specific stock has a global reach, take a look at the global level and see how the majority of economies across the world are doing. Are many economies in Recession? Are they coming off a multi-month low? Has economic expansion been consistently moving higher or at least showing signs of improvement?
Fundamental Analysis - Bottom Up Approach

Once a specific potential business is identified, then you can take a closer look at how the company is performing and expectations for future performance.

One way to do this is to look into the company financial information found on financial statements and coming up with some type of valuation.

In addition to checking financial statements and statistics you can check into any product developments in the works, new services coming or any other business plans the company has underway that may affect your decision as well as taking a look at how the management is performing and has performed compared with previous expectations.

Keep in mind that the different levels mentioned above are only examples and do not have to be included in every analysis based on each persons specific needs. For example: A business that appears to be fine individually, may be in a sector that is performing very badly with a poor local or global outlook for the future. In this case, it may not matter that the company appears to be fine. The stock price may get dragged down with others due to broader factors.

Another example would be a global and local economy that it doing poorly and has a poor outlook, but a specific sector or industry that is doing well. Maybe providing counseling services or employment services.

These are examples of using specific levels of analysis with more weighting than others to come up with potential stocks to select.

Since this article is primarily targeting the sequence used when performing Fundamental analysis using a Top Down approach, we won't get into any specific details here about financial statistics. That will have to be addressed on another page down the road.

Here's a great resource for doing your fundamental analysis to keep you busy for a while (they have a great free as well as premium service): Unlimited Stock and Fund Insight from Morningstar. Learn More..

Note: All of the above information in this post is based on my opinions of this topic and may not be the same opinions as others have. Many times different people have different views on the same topic. When learning and doing any type of research, it's a good idea to practice and see what works for you before implementing the strategy with real funds. Better to be safe than sorry.

Related Fundamental Analysis Pages on This Site:

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