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Is fundamental analysis of a stock sometimes a fad?

Is fundamental analysis of a stock sometimes a fad?
Two market experts were debating on a news channel on how Infosys stock could even hit Rs 4000 shortly. The usual EPS and price to earnings multiple for the stock were bought into the picture. While one them went as far as stating the EPS for 2017, the other said he could not think that far.

I would agree with the latter as taking fundamental analysis too far can sometimes be foolhardy. Now, let's see why fundamental analysis can sometimes catch you on the wrong foot.

One often reads brokerage research reports on why a stock price could reach a target price of Rs X after analysing the fundamental ratio of price to book value and price to earnings multiple among others. However, what the analysts fails to realise is that we live in an environment that is dynamic and changes frequently.

Not long ago, analysts were recommending an Indian world class pharma company. Suddenly, there is a US FDA ban and the stock price dives to almost one-tenth of its peak levels. It takes years to come out of an US FDA ban. Ditto has been the case with at least three pharma companies in the past.

You spend hours predicting the profitability and p/e ratio of a steel company, only to realise that the company has been hit by a mining ban.

Similarly, to bet on metal companies, you have to study the growth rates in China, because only then metal stocks climb. Forget the fundamental analysis of a company.

You cannot do a fundamental analysis of the telecom sector, simply because you do not know what regulatory hurdles will be imposed by DOT and the Telecom Regulatory Authority of India.

Banking stocks again are plagued by RBI policies. Aviation companies apart from Jet and Spice have gone bankrupt in the past and fundamental analysis have gone for a toss.


This leaves you only with the FMCG sector and to some extent the IT sector, which is more predictable.

In any case, one can study past research reports on fundamentals and one would realise that apart from the IT, FMCG and pharma sector, most of the analysis have gone awry.

Story first published: Saturday, October 12, 2013, 10:06 [IST]
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