With all the different options available when it comes to buying stocks, how does an investor decide where to start? If you have a broker, they'll do most of the heavy lifting for you, but if you're doing it by yourself, you're going to need to look at some data sheets.
At the outset, let it be said that a full-fledged security analysis is a painstaking, highly specialized bit of business. Essentially, it is an effort to predict a company's potential earning power and, hence, the present value of its stock as an investment.
The analyst's raw materials are statistics. He studies earnings reports, balance sheets, stock-market records, and the various ratios that can be derived from them. He considers the company's long-term debt schedule, its expansion plans contemplated or under way and its tax position. He compares the company with its competitors, and checks the performance of its industry group against that of other groups or of the economy as a whole. All of this data, of course, is history. But if the analyst is diligent, his study will turn up statistical patterns and trends that reveal a great deal about the company's consistency, stability, and vigor and suggest more than a little about its basic quality.
To this he adds what he can learn about such largely un-measurable values as the skill and enterprise of the company's management, the possible sales appeal of an upcoming new product, and the growth factors evident in the industry.
In due time, he reaches several conclusions, each bearing on the others. The first is a statement of what the facts and the surmises suggest as to the general quality of the company. The second predicts the per-share earnings, which might be expected in the next year. The third the most difficult feature of security analysis relates the stock's quality and potential to its current price and attempts to say whether, at this level, it is a good investment.
A little reflection, of course, will show how delicate is the balance of these three factors. On a quality basis, for instance, a bright, young electronics company would almost certainly be considered inferior, say, to Westinghouse. Yet if its initial plant-expansion program had been largely depreciated and written off, and the products in which it specialized were in great demand, the earnings prospect could be most attractive and, over the short term, relatively safe. Handsome earnings, however, might have to be discounted if speculative buying of the stock had already shot the price up.
On the other hand, if the company had been largely overlooked, and rested comfortably at a low price level, anticipation of even a modest increase in earnings could make the stock a worthwhile investment.
Most analyses are confined to the short term. There may be factors enabling the analyst to take a longer view. It has been clear since 1945, for instance, that industrial emphasis on electronics and automation virtually guaranteed a glowing future for these fields, whereas full development of peacetime uses for atomic energy may still be a decade off. Such generalities, however, do not say very much about the prospects of individual companies, and any analyst will admit that the farther ahead he looks, the greater the chance for error.
To be frank about it, any analysis will contain many imponderables. Even an experienced analyst inevitably must include informed guesses, inspired hunches, and the "feel" of a situation in arriving at a conclusion. For, excepting the hard figures of a company's financial statements, there are no numerical values to be gleaned from such items as managerial efficiency or sales potential.
In the end, analysis is important, but no one yet has discovered a "crystal ball" that will tell the winners from the losers. It's a gamble, and that's all there is to it.