Fundamental Analysts
Theunderlyingthemeinfundamentalanalysisisthatthetrue
value of the firm can be related to its financial
characteristics—its growthprospects, risk profile,and cash
flows.Anydeviationfromthistruevalueisasignthatastock
is undervalued orovervalued. It is a long-term investment
strategy, and the assumptions underlying it are that:
- Therelationship betweenvalue and the underlying
financial factors can be measured. - The relationship is stable over time.
- Deviations fromthe relationshiparecorrectedin a
reasonable time period.
Fundamental analysts include both value and growth
investors.Thekeydifferencebetweenthetwoisinwherethe
valuation focus lies. Reverting back to our breakdown of
assetsinFigure1.1,valueinvestorsareprimarilyinterestedin
assetsinplaceandacquiringthematlessthantheirtruevalue.
Growth investors arefar morefocused on valuing growth
assetsandbuyingthoseassetsatadiscount.Whilevaluation
isthecentralfocusinfundamentalanalysis,someanalystsuse
DCFmodelstovaluefirms,whileothersusemultiplesand
comparable firms. Since investors hold a large number of
undervaluedstocksintheirportfolios,theirhopeisthat,on
average, these portfolios will do better than the market.
Activist Investors
Activist investors take positions in firms that have a
reputation for poormanagement and then use their equity
holdingstopushforchangeinthewaythecompaniesarerun.