Fundamentals for Dumb-Me – Part 3: The Good and The Ugly

It’s not The Good, The Bad and The Ugly.

Let’s face it, when you are trading stocks, there is no in between. There is only The Good and The Ugly and nobody likes ugly. So how can  you keep from being some dope sitting at a bar after four tequilas unable to tell if that chick or dude (or stock) is ugly?

In the previous post, I laid out for you some ideas that can help you determine if a company is profitable and being well managed. Previous to that, I gave you instructions to help you find a reasonable value for a company so that you can have an idea of where the stock price could go and thus determine if the stock is a good buy. But there is no point in doing all that work on a company that is being run into the ground by its management because that is just plain ugly!

Before we continue, let me say once again, that while what I am presenting here is certainly true and a good argument for fundamentals, many stocks don’t give a damn what they are worth. After all, I have certainly made a case for the idea that all this fundamental noise never made me a better trader, but charting has.

Since I have shared with you a few of my tricks for simple valuation and looking up data for free on the Internets, let’s take a look at how those fundamentals actually move a stock. I present for you two companies for comparison. $AMSC and $EMKR. These companies tracked one another rather closely early on .

Take a look at this chart from 1998 to 2007. I have plotted with simple lines here so that you can easily see the comparison. Notice how closely they tracked each other during this time frame. They were pretty well matched.

The following chart compares the two companies from 2001 to present day. Note the divergence since 2008. Can you guess why these companies went in such different directions?

Now let’s take a look at their income statements. Here are the Revenue and Operating Expenses using the past five quarters for $AMSC. Notice how the revenues and costs increased at a reasonable rate.  Margins are working nicely for this company. Management clearly has a good handle on running this business and keeping it profitable.

When we look at $EMKR’s income statement over the past five quarters, however, we can see that sales and costs are sporadic and that management clearly has trouble making this company profitable. In fact, they are just flat out losing money.

This quick little check can help you decide whether you should even bother flirting much less consider taking him/her home. If you do, you will only be left broke and disgusted in the morning.

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