Combining the Power of Fundamental and Technical Trading Systems

Two good investing philosophies: Why not use both?
December 22, 2020
4 mins read

The majority of investors subscribe to one of two philosophies: technical or fundamental analysis. The first uses numerical data to predict future moves in the price of securities. The second focuses on the qualitative characteristics of a company, like its management, earnings or new products. When it comes to activities like day trading and swing trading, there’s a preference for technical analysis for holding a position, which does a good job of working with objective information like share price history, moving averages and momentum indicators. That’s a general observation to which there are many exceptions, but for the most part it’s accurate.

Likewise, long-term investors tend to be more interested in a corporation’s quality, and will often employ all fundamental strategies like CANSLIM and other systems for evaluating a firm’s overall health. Is there a happy medium, a technique that combines the raw data of tech studies with the qualitative analysis of the fundamentalists? Here’s a brief look at several trading methods that meld the two traditional approaches in the hopes of making more accurate predictions about the future of a given company’s stock price and general financial health.

EPS-Price Crossovers

Earnings per share is one of the keys of fundamental analysis because it at least attempts to reveal how much money a company is earning per share of outstanding stock. When combined with the most important technical data point, share price, EPS reveals important aspects of a company’s forward path. For example, when EPS is higher than the current stock price, that’s usually considered to be a good thing. It means the firm is generating more money than the stock’s price would indicate. By watching for crossovers of these two metrics, investors can gain keen insight into a company’s changing financial situation. If EPS suddenly moves far below the price, that could spell trouble. Likewise, if earnings rise enough to far outpace price, then the future looks bright.

Average Length of Board Tenure (ALBT)

This metric is not so much a combination of tech and fundamentalism as it is an application of quantitative study to a traditional fundamental characteristic: board experience. So, if a 20-member board of directors have spent a collective 300 years at ABC Corp., the ALBT would be 15 years. It’s possible to compare ALBT’s to see which corporations have boards with the longest average tenure. Using an average eliminates the built-in advantage of large boards and allows for comparisons between entities of all sizes.

Earnings Per Employee (EPE)

While EPS has its advantages and is one of the most popular of all fundamental metrics, it’s possible to gain a different perspective by examining earnings per employee. What does EPE reveal? In short, it is a direct way of measuring how much money an organization generates per worker. If a startup with 10 workers, for example, is able to show annual earnings of $2 million, the EPE is $200,000. Is that good or bad? Well, consider that one of the world’s largest automakers, General Motors, has an EPE of $41,000. That means our fictitious startup’s $200,000 EPE is impressive indeed. The small entity is able to generate about five times the earnings per employee as a long-standing member of the Fortune 500.

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