ANZ Banking Group [ASX:ANZ] has come off its new year start of $27.53. Shares are down 9.12%, but have they dropped too far?
Source: Google finance
The constant decline of the S&P/ASX 200 has made it a great market for fundamental investors. One of the most famous fundamental investors is Warren Buffett. He shows how successful fundamental investing can be.
There are two major types of analysis when it comes to investing.
The first is Fundamental analysis. For those of us that don’t know, fundamental investing involves analysing stocks using factors that affect their actual business. For example if a company has great financial statements its means multiple things. Some of the indicators are:
- Strong earnings growth
- High levels of cash
- Low levels of debt
If most financials are satisfied then the company might be worth investing in. Or on a broader scope you could analyse the industry your company is in. Looking at how they are positioned against their competitors.
This strategy is in contrast to Technical analysis. Technical analysis is more concerned with the statistics generated by market activity. Past price and volume charts are used by technical analysts to identify patterns in that can suggest future movement. The intrinsic value does not necessarily matter to the technical analyst. More important is what the market will do next.
Which one is better?
The core difference between the two styles is: one uses charts and one uses financial statements.
Fundamental analysis tries to determine a company’s intrinsic value. Technical analysts believe charts hold all the relevant information of stock. But I still haven’t told you which one is better.
I suggest you use both. Fundamental analysis for long term investments. Technical analysis for short term trades.
But let’s go back to ANZ and fundamental analysis. In a bear market stocks that are fundamentally sound start to become cheaper and cheaper. Why? Because stocks with good fundamentals that were over-price now become under-priced. That’s why Warren loves bear markets.
Now, I’m not saying that if any company is fundamentally sound it’s a definite buy. There are plenty of fundamentally great stocks that are overpriced. Thus the price of the stock must be taken into account when looking at a company’s earnings growth or cash flow statement.
It’s up to the discretion of the investor to determine what the stocks fair value should be, which may be tricky. Fair value usually can be estimated on the basis of future earnings and other factors. I know it sounds tricky and that’s because it is. If investing was easy then we’d all be rich.
But the big question is, does ANZ look fundamentally cheap right now?
First we have to determine what classifies as a fundamentally cheap stock. As generally measure, operating cash flows, earnings growth and PEG (price/earnings to growth) should be high.
|ANZ growth and figures from 2014-15|
|Operating cash flow||↑280%|
|EBT (pre-tax profit)||↑14.25%|
|D/E (debt to equity ratio)||14.51|
|Bellamys growth and figures from 2014-15|
|Operating cash flow||↑513%|
|EBT (pre-tax profit)||↑590.47%|
|D/E (debt to equity ratio)||0.48|
ANZ’s performance from the three figures above isn’t too bad. Operating cash flow has increased substantially. Yet ANZ also have a massive amount of borrowings, symbolised by their D/E ratio.
If we compare ANZ to Bellamy’s Australia [ASX:BAL], one of the best performing stocks last year, BAL is the clear winner. BAL has debt levels which are manageable along with an EBT far higher.
Overall ANZ doesn’t classify as a great buy fundamentally. But depending on upcoming earnings outlooks and dividend payments ANZ’s fundamentals may change.
In the next three years some analyst are expecting ANZ’s EBT to grow by only 2.74%. Sure, ANZ might not look like a buy right now based on its fundamentals. But the market is forever changing. And it may present an opportunity for a prepared investor, sometime in the future.
Junior Analyst, Money Morning