What is the difference between technical and fundamental analysis?

Overview

The process of evaluating businesses and projects to determine their performance and financial suitability is known as Financial Analysis. It is basically used to analyze whether an entity is stable, liquid, or profitable enough to sanction a monetary investment. There are two major types of financial analysis when approaching investment in the stock market: “Fundamental Analysis” and “Technical Analysis”.

Financial analysis, both Fundamental and basics of technical analysis, are crucial as they provide an idea to investors on investing their funds in a particular company. It is also helpful to government agencies in analyzing the taxes owed to the firm.

WHAT ARE THE IMPORTANT FEATURES OF TECHNICAL ANALYSIS AND FUNDAMENTAL ANALYSIS?

  • With fundamental analysis, an investor uses all the available data that affects a company economically, to gauge a share’s value. It can be qualitative (intangibles, like the quality of the company, brand value/recognition, management of the company) or quantitative (numbers like dividends, earnings, sales and book values of the company). This, on the whole, helps an investor know more about the financial health of a company.
  • In technical analysis, an investor assumes “it is all in the price”. The historical price data from the charts, act as a guide to the future. The charts by itself, as it is believed, offers a visual summary of what a stock has been doing. A few technical indicators are MA’s, Oscillators, Volume measures, etc.
  • Fundamental analysis assumes that share prices will reflect fundamentals in the long run. It tells an investor nothing about timing, and it is time-consuming as well.
  • Technical analysis, however, clues an investor into factors like sentiment or speculation, while also informing the right timing for an investment, unlike the fundamentals approach.

– While both types of analysis are used for researching and forecasting future trends in stock prices, both have their advocates and adversaries.

WHAT ARE THE MAJOR DIFFERENCES BETWEEN TECHNICAL ANALYSIS AND FUNDAMENTAL ANALYSIS?

  • Fundamental analysis uses ratios gathered from data within the financial statements, such as a company’s earnings per share (EPS) to determine the intrinsic value of a security or value of a business.
  • Technical analysis assumes a security’s value is already determined by its price, where the only inputs are the stock’s price and volume, while it focuses instead, on trends in value over time.
  • Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns rather than analyzing a security’s fundamental attributes.
  • The fundamental analysis approach does not look at short term pricing and trading swings, hence this is considered a long term investment approach.
  • Technical analysis is considered far more of a short term methodology.
  • Fundamental analysis is all about investing in companies and relying on their underlying value to drive your returns.
  • Technical analysis is a trading strategy where you are aiming to drive returns out of identified trends and opportunities.
  • Earnings, expenses, assets, and liabilities are all important characteristics to fundamental analysts.
  • Technical analysts generally use only stock charts to identify patterns and trends that suggest what a stock will do in the future.
  • Day trading, swing trading, options trading is possible in Technical analysis.
  • Surveys show short-term, rather active traders and panic traders going for a technical approach over fundamental, while the markets move more on the fundamentals.

Summary

To conclude, one approach cannot be called better than the other. Both fundamental and technical analysis go hand-in-hand as one is said to be a reflection of the other. This is because if one has great charts, it automatically means great fundamentals as well, and vice-versa. It is just a matter of personal preferences and trading styles, and what one likes to look at while evaluating stocks and investments.

  • Relevant factors considered in Fundamental analysis include:
  • Revenues, expenses, and income
  • Growth prospects of the company
  • The competitive factors a company faces
  • Expected return on equity or assets in the industry
  • Relevant factors considered in Technical analysis include:
  • Historical pricing of the shares
  • Trading volumes over time
  • Industrial trading trends

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CRUDE OIL PRODUCTION CUT: THE ICE HAS BEEN BROKEN

Broken Ice on Lake Louise

Finally, on 10th December, 2016 OPEC and non-OPEC members have reached their first deal since 2001 to jointly reduce crude oil output in order to check oversupply. Last week, OPEC agreed to slash output by 1.2 million barrels per day from 01st January, 2017, with top exporter Saudi Arabia cutting as much as 486,000 bpd. On Saturday, producers from outside the 13-country group agreed to reduce output by 558,000 bpd, short of the initial target of 600,000 bpd, but still the largest contribution by non-OPEC ever. Of that, Russia will cut 300,000 bpd.

THE SMOKE AND THE FIRE

smoke

The associations took a long time to arrive at the decision which provided ample time to speculate on the fate of the fuel of the fuels. It has been reported since 2011 that the oil market is in oversupply and rumors were rife about a production cut. After a relentless downtrend seen in 2014 and 2015, Crude oil prices found some support this year amid OPEC and non-OPEC members’ growing tussle for a production cut deal. However, 2016 also started on a negative note with prices tumbling to $26 per barrel, the lowest level in a decade. Throughout 2014-2015, Saudi Arabia raised output steeply in an attempt to drive higher-cost producers such as U.S. shale firms out of the market. This move helped reduce growth in U.S. shale output but it also hit the revenues of oil-dependent economies including Saudi Arabia and Russia, prompting the two largest exporters of crude to start their first oil cooperation talks in 15 years. Meanwhile after mid-February this year, things started to improve and what we saw was a consistent recovery since then with a few spells of pullback seen in between.

Now that the long pending decision has been taken, the analysis begins for how much this event has been already discounted. Let us drill into the possibilities through fundamental and technical view.

THE MUD AND THE WATER 

crude

OPEC has a long history of cheating on output quotas. The fact that Nigeria and Libya were exempt from the deal due to production-denting civil strife will further pressure OPEC leader Saudi Arabia to shoulder the bulk of supply reductions. Russia, which 15 years ago failed to deliver on promises to cut in tandem with OPEC, is expected to perform real output reductions this time. OPEC and the non-OPEC countries at the meeting were responsible for 55 percent of global output. Their joint reduction of around 1.8 million bpd would account to about 2 percent of global oil supply. All these facts amid various paradoxes points towards a mid-term rally and despite being discounted, a large chunk of the upside seems to be still remaining to be achieved.

THE CRYSTAL CLEAR VIEW

Technically, prices are looking all set to take a yearly close above $53. If we see the technical chart through wave patterns & Fibonacci studies then the formation on monthly chart seems to be like an incomplete ‘X’ wave. The third and final leg of ‘X’ wave has initiated above $52 and there are fair possibilities for prices to strongly sustain above this mark. On crossing next hurdle at $55, prices are likely to travel further northward in the range of $64-$69 as per the Fibonacci retracement studies.

Arihant’s Value Plus – December 2016

cover-page

Arihant’s Value Plus December 2016 is now available.

Going ahead, Indian equity markets will continue to remain volatile this month due to major events i.e. Italy referendum on December 4, RBI monetary policy review on December 7, ECB monetary policy on December 8, US Fed meeting outcome on December 14 and the development in ongoing winter session that will be keenly watched for market direction. Further, the dollar-rupee movement, macroeconomic events, movement in crude oil prices, foreign fund inflows, and upcoming Q3FY17 corporate earnings are also likely to affect equity markets. The liquidity concerns arise from the demonitisation is likely to slow demand in short term and impact equity markets. We recommend investors that don’t change perception by these short term fluctuations and see market corrections as an opportunity to invest in fundamentally sound companies.

This month’s issue contains:

  • Movers & Shakers
  • Market Outlook
  • Fundamental Picks
  • Auto Sector Nov Sales
  • Commodity Outlook
  • Mutual Fund
  • Key Financial Events

We hope you find this issue of Value Plus useful. Please share your feedback on research@arihantcapital.com.

Click here to go through our flipbook now.

Click here to download PDF report.

IPO: Laurus Labs Limited

laurus-ipo

Company & Business Profile

Laurus Labs Limited (“Laurus Labs”) was originally incorporated on September 19, 2005 at Hyderabad, Andhra Pradesh as a Private Limited Company. The company was subsequently converted into a public limited company and its name was changed to Laurus Labs Limited. The name of the company was changed to Aptuit Laurus Limited consequent to the strategic partnership entered into by the company with Aptuit Singapore. Thereafter the company was converted into a private limited company and its name was changed to Aptuit Laurus Private Limited.  Subsequently the name of the company was changed to Laurus Labs Private Limited consequent to the proposed dilution of the shareholding of Aptuit Singapore in the company. The company was converted into a public limited company and the name of the company was changed to Laurus Labs Limited.

Laurus Labs Limited is the leading research and development (R&D) driven pharmaceutical company in India, with a leadership position in Generic Active Pharmaceutical Ingredients (APIs) for select, high-growth Therapeutic areas of Anti-Retrovirals (ARVs) and Hepatitis C.

 The company also manufacture APIs in Oncology and other Therapeutic areas. The strategic and early investments in R&D and Manufacturing infrastructure have enabled them to become one of the leading suppliers of APIs in the ARV therapeutic area to multi-national pharmaceutical formulation companies which cater to the large and fast-growing “Donor-Funded Access-to-Medicines Markets” of Sub-Saharan Africa, South-East Asia and Latin America.

During the financial year 2016, Laurus Labs Limited sold their APIs in 32 countries. The company also has growing Synthesis and Nutraceutical/Cosmeceutical Ingredients businesses. Further, they are increasingly focusing towards growing their integrated generics Finished Dosage Forms (FDFs) business.

Key Strengths

  • Leadership in APIs in select, high growth therapeutic areas.
  • Strong R&D capabilities and process chemistry skills.
  • Industry leading, modern and regulatory compliant manufacturing capacities.
  • Long-standing relationships with multi-national pharmaceutical companies.
  • Experienced promoters and qualified operational personnel.
  • Established track record of delivering growth.

Objects of the Issue 

  • To pre-payment of term loans.
  • To general corporate purposes.

 Listing 

The equity shares of the company are proposed to be listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Apply in IPO now in ASBA mode, to apply call us at 0731-4217261.

IPO : Sheela Foam Limited

sheela-group-ipo

Company & Business Profile

Sheela Foam Limited was incorporated in 1971, and over the last two decades, has developed Sleepwell as an overarching brand associated with comprehensive and quality home comfort solutions.Company believes that the recall of “Sleepwell” brand has been established by an extensive suite of products that range from baseline bedding and furniture cushioning material to ergonomically tailored offerings, an emphasis on quality control and focused brand building.

Objects of the Issue

The objects of the Offer for sale from the promoter is offering shares for sale. The Company believes that the listing of the Equity shares will enhance its brand name and provide liquidity to the existing shareholders. Listing will also provide a public market for the Equity Shares in India.

Listing 

The equity shares of the company are proposed to be listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Outlook & Valuations

The issue has been offered in a price band of  Rs 680-730 per equity share. At the upper price band the stock is available at P/E  of 27(x) based on FY17E financials. Industry composite PE for the company stands at 40(x). However, the RoE for the stock is 31% for FY16. We have “3 star” rating for the issue.

Apply in IPO now in ASBA mode, to apply call us at 0731-4217261. Read http://bit.ly/2gCpekPto know further