Introduction 1 About This Book 2 Icons Used in This Book 2 Beyond the Book 3 Where to Go from Here 3 Part 1: What Fundamental Analysis is and Why You Should Use it 5 Chapter 1: Understanding Fundamental Analysis 7 Why Bother with Fundamental Analysis? 8 Some of the real values of fundamental analysis 9 Driving home an example 10 Putting fundamental analysis to work 10 Knowing what fundamentals to look for 12 Knowing what you need 13 Knowing the Tools of the Fundamental Analysis Trade 14 Staying focused on the bottom line 14 Sizing up what a company has to its name 14 Burn baby burn: Cash burn 15 Financial ratios: Your friend in making sense of a company 15 Making Fundamental Analysis Work for You 16 Using fundamentals as signals to buy or sell 16 The perils of ignoring the fundamentals 16 Using fundamental analysis as your guide 17 Chapter 2: Getting Up to Speed with Fundamental Analysis 19 What is Fundamental Analysis? 20 Going beyond betting 20 Understanding how fundamental analysis works 22 Who can perform fundamental analysis? 23 Following the money using fundamentals 25 Comparing Fundamental Analysis with Other Ways of Picking Investments 26 How fundamental analysis stacks up against index investing 26 Comparing fundamental analysis with technical analysis 27 Putting Fundamental Analysis to Work for You 28 How difficult is fundamental analysis? Do I need to be math wizard? 29 Is fundamental analysis for you? 29 The risks of fundamental analysis 30 Making Money with Fundamental Analysis 31 Putting a price tag on a stock or bond 31 Being profitable by being a "contrarian" 32 The Fundamental Analysis Toolbox 33 Introducing the income statement 33 Balance-sheet basics 33 Getting the mojo of cash flows 34 Familiarizing yourself with financial ratios (including the P-E) 35 Chapter 3: Gaining an Upper Hand on Wall Street: Why Fundamental Analysis Gives Investors an Edge 37 Better Investing with Fundamentals 38 Picking stocks for fundamental reasons 39 Dooming your portfolio by paying too much 43 Sitting through short-term volatility 44 Relying on the Basic Info the Pros Use 45 What is "the Warren Buffett Way"? 45 Checking in on Graham and Dodd 47 Figuring Out When to Buy or Sell a Stock 48 Looking beyond the per-share price 49 Seeing how a company''s fundamentals and its price may get out of alignment 50 Avoiding overhyped "story stocks" 51 Pairing buy-and-hold strategies with fundamental analysis 52 Looking to the long term 53 Patience isn''t always a virtue 54 Chapter 4: Getting Your Hands on Fundamental Data 55 Getting in Sync with the Fundamental Calendar 56 Which companies must report their financials to the public? 56 Kicking it all off: Earnings season 57 Getting the earnings press release 58 Bracing for the 10-Q 59 Running through the 10-K 61 Flipping through the annual report 62 There''s no proxy like the proxy statement 63 Getting up to Speed with the Basic Accounting and Math 64 Operating activities: Finding smooth operators 65 Investing activities: You have to spend money to make money 65 Financing activities: Getting in tune with high finance 66 Learning a key fundamental math skill: Percentage changes 67 How to Get the Fundamental Data You Need 68 Getting acquainted with the SEC''s database 68 Step-by-step directions on accessing company fundamentals using EDGAR 69 Pulling fundamental data from websites into spreadsheets 70 Finding stocks'' dividend histories 71 Getting stock-split information 72 Part 2: How to Perform Fundamental Analysis 75 Chapter 5: Analyzing a Company''s Profitability Using the Income Statement 77 Digging Deep into the Income Statement 78 Cutting through to the key parts 78 Taking in the Top Line: Revenue 80 Breaking down a company''s revenue 81 Keeping tabs on a company''s growth 82 What are the company''s costs? 85 Calculating Profit Margins and Finding Out What They Mean 89 Differences between the types of profit margins 89 Finding out about earnings per share 92 Comparing a Company''s Profit to Expectations 93 The importance of investors'' expectations 94 Comparing actual financial results with expectations 94 Chapter 6: Measuring a Company''s Staying Power with the Balance Sheet 97 Familiarizing Yourself with the Balance Sheet 98 Separating your assets from your liabilities 98 The most basic equation of business 99 Understanding the Parts of the Balance Sheet 100 Covering your bases with assets 100 Getting in touch with a company''s liabilities 102 Taking stock in a company''s equity 104 Analyzing the Balance Sheet 106 Sizing up the balance sheet with common-sizing 106 Looking for trends using index-number analysis 108 Appreciating working capital 110 Analyzing here and now: The current ratio 111 The Danger of Dilution 111 How stock can be watered down 112 Knowing how stock options can contribute to dilution 113 Soaking up extra shares with buybacks 113 Chapter 7: Tracking Cash with the Statement of Cash Flow 115 Looking at the Cash-Flow Statement as a Fundamental Analyst 116 Getting into the flow with cash flow 117 Breaking the cash-flow statement into its key parts 118 Examining a company''s cash flow from operations 119 Considering a company''s cash from investments 123 Getting into a company''s cash from financing activities 124 How Investors May be Fooled by Earnings, But Not by Cash Flow 126 A quick-and-dirty way to monitor a company''s cash flow 127 Understanding the Fundamentals of Free Cash Flow 130 Calculating free cash flow 130 Measuring a company''s cash-burn rate 131 Chapter 8: Using Financial Ratios to Pinpoint Investments 133 Using Financial Ratios to Find Out What''s Really Going on at a Company 134 Which financial ratios you should know and how to use them 135 Using ratios to grade management 137 Checking up on a company''s efficiency 140 Evaluating companies'' financial condition 142 Getting a handle on a company''s valuation 144 Getting Familiar with the Price-to-Earnings Ratio 147 How to calculate the P-E 147 What a P-E tells you about a stock 148 Putting the P-E into Perspective 149 Taking the P-E to the next level: the PEG 149 Evaluating the P-E of the entire market 150 Chapter 9: Mining the Proxy Statement for Investment Clues 153 Getting up to Speed with What the Proxy Statement is 154 Uncovering info in the proxy statement 154 Getting your hands on the proxy 155 Expanding Fundamental Analysis Beyond the Numbers 157 Appreciating corporate governance 157 Getting to know the board 158 Stepping through the Proxy 159 Getting to know the board of directors 159 Analyzing the independence of board members 159 Delving into the board''s committees 160 Finding potential conflicts between the board and the company 161 Understanding how the board is paid 161 Auditing the auditor 162 Finding out about the other investors in a stock 163 How Much are We Paying You? Understanding Executive Compensation 164 Figuring out how much executives earn 165 Checking out the other perks executives receive 166 Where the real money comes from: Options and restricted stock 168 Checking in on your Fellow Shareholders 168 Finding out who else owns the stock 168 What''s on other investors'' minds: Shareholder proposals 169 Part 3: Making Money with Fundamental Analysis 171 Chapter 10: Looking for Fundamental Reasons to Buy or Sell 173 Looking For Buy Signals from the Fundamentals 174 Finding companies that have staying power 175 Looking for a company on the rise 179 Betting on the brains behind the operation 181 Minding the earnings yield 183 Knowing When to Bail out of a Stock 184 Breaking down some top reasons to say adios to a stock 185 Why selling stocks everyone else wants can be profitable 186 What Dividends can Tell You about Buying or Selling a Stock 187 Calculating the dividend yield 188 Knowing if you''re going to get the dividend 189 Making sure the company can afford the dividend 190 Using dividends to put a price tag on a company 191 Chapter 11: Finding a Right Price for a Stock Using Discounted Cash Flow 195 How to Stop Guessing How Much a Company is Worth 196 How minding intrinsic value can help you 197 Getting up to speed for the discounted cash flow 198 Performing a Discounted Cash Flow Analysis 201 Starting out with free cash flow 202 Getting the company''s shares outstanding 202 Estimating the company''s intermediate-term growth 203 Going way out: Forecasting long-term growth 204 Measuring the discount rate 204 Putting it all together 207 Making the Discounted Cash Flow Analysis Work for You 211