In a bull run, whenever you ask someone, “Is this stock fundamentally strong?” The usual answer you would hear is Yes.
But the fact is that you would know the real fundamentally strong stocks when there is market crash.
People may use all sorts of ratios like PE, PEG, RoCE and they are not wrong. In fact, sometimes even I use them. But there is one combination which I regularly use to find fundamentally strong stocks.
Always Use Moving Average on a Monthly Chart
As a short term trader or a swing trader the moving average I use is either 13 or 21. But when you are in for the long haul. I usually use 55-day moving average.
If the stock price has been sustaining above the 55-day moving average continuously for 5 years. I assume it be fundamentally strong.
Moving Average Convergence Divergence (MACD) is an ultimate tool that tell you whether the stock is going to rally or see a correction. Using this tool on a monthly chart gives you a view on a long term basis.
If a Bullish Divergence is about to happen, hold on for a while for a signal confirmation. If Bullish Divergence has just happened invest heavily. If Bullish Divergence has happened long back and is mid-way, try looking for a better option.
Calculation of Fair Value
Many might be using Financial Projections to value a stock. However, I would differ on the metric calculated through this method because at the end of the day it is just a projection. How would you know for sure whether your stock is overvalued or undervalued?
To know this I take the Industry PE and multiply it with the EPS of the stock. If the result is greater than the CMP of the stock – it implies that the stock is undervalued and vice-versa.
The above given combination has never failed me, hence, sharing with you guys.