Fundamental Analysis - Weaknesses

Weaknesses of Fundamental Analysis

Time Constraints

Fundamental analysis may offer excellent insights, but it can be extraordinarily time-consuming. Time-consuming models often produce valuations that are contradictory to the current price prevailing on Wall Street. 

When this happens, the analyst basically claims that the whole street has got it wrong. This is not to say that there are not misunderstood companies out there, but it is quite brash to imply that the market price, and hence Wall Street, is wrong.

Industry / Company Specific

Valuation techniques vary depending on the industry group and specifics of each company. For this reason, a different technique and model is required for different industries and different companies. This can get quite time-consuming, which can limit the amount of research that can be performed. A subscription-based model may work great for an Internet Service Provider (ISP), but is not likely to be the best model to value an oil company.

Subjectivity

Fair value is based on assumptions. Any changes to growth or multiplier assumptions can greatly alter the ultimate valuation. Fundamental analysts are generally aware of this and use sensitivity analysis to present a base-case valuation, an average-case valuation and a worst-case valuation. However, even on a worst-case valuation, most models are almost always bullish, the only question is how much so. The chart below shows how stubbornly bullish many fundamental analysts can be.

Analyst Bias

The majority of the information that goes into the analysis comes from the company itself. Companies employ investor relations managers specifically to handle the analyst community and release information. As Mark Twain said, "there are lies, damn lies, and statistics." When it comes to massaging the data or spinning the announcement, CFOs and investor relations managers are professionals. 

Only buy-side analysts tend to venture past the company statistics. Buy-side analysts work for mutual funds and money managers. They read the reports written by the sell-side analysts who work for the big brokers (CIBC, Merrill Lynch, Robertson Stephens, CS First Boston, Paine Weber, DLJ to name a few). These brokers are also involved in underwriting and investment banking for the companies. 

Even though there are restrictions in place to prevent a conflict of interest, brokers have an ongoing relationship with the company under analysis. When reading these reports, it is important to take into consideration any biases a sell-side analyst may have. 

The buy-side analyst, on the other hand, is analyzing the company purely from an investment standpoint for a portfolio manager. If there is a relationship with the company, it is usually on different terms. In some cases this may be as a large shareholder.

Definition of Fair Value

When market valuations extend beyond historical norms, there is pressure to adjust growth and multiplier assumptions to compensate. If Wall Street values a stock at 50 times earnings and the current assumption is 30 times, the analyst would be pressured to revise this assumption higher. 

There is an old Wall Street adage: the value of any asset (stock) is only what someone is willing to pay for it (current price). Just as stock prices fluctuate, so too do growth and multiplier assumptions. Are we to believe Wall Street and the stock price or the analyst and market assumptions?

It used to be that free cash flow or earnings were used with a multiplier to arrive at a fair value. In 1999, the S&P 500 typically sold for 28 times free cash flow. However, because so many companies were and are losing money, it has become popular to value a business as a multiple of its revenues. This would seem to be OK, except that the multiple was higher than the PE of many stocks! Some companies were considered bargains at 30 times revenues.

Conclusions

Fundamental analysis can be valuable, but it should be approached with caution. If you are reading research written by a sell-side analyst, it is important to be familiar with the analyst behind the report. We all have personal biases, and every analyst has some sort of bias. There is nothing wrong with this, and the research can still be of great value. Learn what the ratings mean and the track record of an analyst before jumping off the deep end. Corporate statements and press releases offer good information, but they should be read with a healthy degree of scepticism to separate the facts from the spin. Press releases don't happen by accident; they are an important PR tool for companies. Investors should become skilled readers to weed out the important information and ignore the hype. 

Fundamental Analysis - Strengths

Strengths of Fundamental Analysis

Long-term Trends 
Fundamental analysis is good for long-term investments based on very long-term trends. The ability to identify and predict long-term economic, demographic, technological or consumer trends can benefit patient investors who pick the right industry groups or companies. 

Value Spotting

Sound fundamental analysis will help identify companies that represent a good value. Some of the most legendary investors think long-term and value. Graham and Dodd, Warren Buffett and John Neff are seen as the champions of value investing. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power.

Business Acumen

One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such painstaking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company. Earnings and earnings expectations can be potent drivers of equity prices. Even some technicians will agree to that. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver.  

In addition to understanding the business, fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. A stock's price is heavily influenced by its industry group. By studying these groups, investors can better position themselves to identify opportunities that are 

  high-risk (tech),
  low-risk (utilities),
  growth oriented (computer),
  value driven (oil),
  non-cyclical (consumer staples),
  cyclical (transportation) or
  income-oriented (high yield).

Knowing Who's Who

Stocks move as a group. By understanding a company's business, investors can better position themselves to categorize stocks within their relevant industry group. Business can change rapidly and with it the revenue mix of a company. This happened to many of the pure Internet retailers, which were not really Internet companies, but plain retailers. Knowing a company's business and being able to place it in a group can make a huge difference in relative valuations.

  

Fundamental Analysis - Criticisms And Valuation

FUNDAMENTALS: QUANTITATIVE AND QUALITATIVE 

You could define fundamental analysis as "researching the fundamentals", but that doesn't tell you a whole lot unless you know what fundamentals are. As we mentioned in the introduction, the big problem with defining fundamentals is that it can include anything related to the economic well-being of a company. Obvious items include things like revenue and profit, but fundamentals also include everything from a company's market share to the quality of its management. 

The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn't all that different from their regular definitions. Here is how the MSN Encarta dictionary defines the terms: 

• Quantitative – capable of being measured or expressed in numerical terms.
• Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.

In our context, quantitative fundamentals are numeric, measurable characteristics about a business. It's easy to see how the biggest source of quantitative data is the financial statements. You can measure revenue, profit, assets and more with great precision. 

Turning to qualitative fundamentals, these are the less tangible factors surrounding a business - things such as the quality of a company's board members and key executives, its brand-name recognition, patents or proprietary technology. 

QUANTITATIVE MEETS QUALITATIVE 

Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the Coca-Cola Company, for example. When examining its stock, an analyst might look at the stock's annual dividend payout, earnings per share, P/E ratio and many other quantitative factors. However, no analysis of Coca-Cola would be complete without taking into account its brand recognition. Anybody can start a company that sells sugar and water, but few companies on earth are recognized by billions of people. It's tough to put your finger on exactly what the Coke brand is worth, but you can be sure that it's an essential ingredient contributing to the company's ongoing success. 

THE CONCEPT OF INTRINSIC VALUE 

Before we get any further, we have to address the subject of intrinsic value. One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock's "real" value. After all, why would you be doing price analysis if the stock market were always correct? In financial jargon, this true value is known as the intrinsic value. 

For example, let's say that a company's stock was trading at $20. After doing extensive homework on the company, you determine that it really is worth $25. In other words, you determine the intrinsic value of the firm to be $25. This is clearly relevant because an investor wants to buy stocks that are trading at prices significantly below their estimated intrinsic value. 

This leads us to one of the second major assumptions of fundamental analysis: in the long run, the stock market will reflect the fundamentals. There is no point in buying a stock based on intrinsic value if the price never reflected that value. Nobody knows how long "the long run" really is. It could be days or years. 

This is what fundamental analysis is all about. By focusing on a particular business, an investor can estimate the intrinsic value of a firm and thus find opportunities where he or she can buy at a discount. If all goes well, the investment will pay off over time as the market catches up to the fundamentals. 

The big unknowns are: 

1)You don't know if your estimate of intrinsic value is correct; and 
2)You don't know how long it will take for the intrinsic value to be reflected in the marketplace. 

CRITICISMS OF FUNDAMENTAL ANALYSIS 

The biggest criticisms of fundamental analysis come primarily from two groups: proponents of technical analysis and believers of the "efficient market hypothesis". 

Technical analysis is the other major form of security analysis. We're not going to get into too much detail on the subject. (More information is available in our Introduction to Technical Analysis tutorial.)

Put simply, technical analysts base their investments (or, more precisely, their trades) solely on the price and volume movements of securities. Using charts and a number of other tools, they trade on momentum, not caring about the fundamentals. While it is possible to use both techniques in combination, one of the basic tenets of technical analysis is that the market discounts everything. Accordingly, all news about a company already is priced into a stock, and therefore a stock's price movements give more insight than the underlying fundamental factors of the business itself. 

Followers of the efficient market hypothesis, however, are usually in disagreement with both fundamental and technical analysts. The efficient market hypothesis contends that it is essentially impossible to produce market-beating returns in the long run, through either fundamental or technical analysis. The rationale for this argument is that, since the market efficiently prices all stocks on an ongoing basis, any opportunities for excess returns derived from fundamental (or technical) analysis would be almost immediately whittled away by the market's many participants, making it impossible for anyone to meaningfully outperform the market over the long term. 

Fundamental analysis seeks to determine the intrinsic value of a company's stock. But since qualitative factors, by definition, represent aspects of a company's business that are difficult or impossible to quantify, incorporating that kind of information into a pricing evaluation can be quite difficult. On the flip side, as we've demonstrated, you can't ignore the less tangible characteristics of a company. 

In this section we are going to highlight some of the company-specific qualitative factors that you should be aware of. 

BUSINESS MODEL 

Even before an investor looks at a company's financial statements or does any research, one of the most important questions that should be asked is: What exactly does the company do? This is referred to as a company's business model – it's how a company makes money. You can get a good overview of a company's business model by checking out its website or reading the first part of its10-K filing (Note: We'll get into more detail about the 10-K in the financial statements chapter. For now, just bear with us). 

Sometimes business models are easy to understand. Take McDonalds, for instance, which sells hamburgers, fries, soft drinks, salads and whatever other new special they are promoting at the time. It's a simple model, easy enough for anybody to understand. 

Other times, you'd be surprised how complicated it can get. Boston Chicken Inc. is a prime example of this. Back in the early '90s its stock was the darling of Wall Street. At one point the company's CEO bragged that they were the "first new fast-food restaurant to reach $1 billion in sales since 1969". The problem is, they didn't make money by selling chicken. Rather, they made their money from royalty fees and high-interest loans to franchisees. Boston Chicken was really nothing more than a big franchisor. On top of this, management was aggressive with how it recognized its revenue. As soon as it was revealed that all the franchisees were losing money, the house of cards collapsed and the company went bankrupt. 

At the very least, you should understand the business model of any company you invest in. The "Oracle of Omaha", Warren Buffett, rarely invests in tech stocks because most of the time he doesn't understand them. This is not to say the technology sector is bad, but it's not Buffett's area of expertise; he doesn't feel comfortable investing in this area. Similarly, unless you understand a company's business model, you don't know what the drivers are for future growth, and you leave yourself vulnerable to being blindsided like shareholders of Boston Chicken were. 

COMPETITIVE ADVANTAGE 

Another business consideration for investors is competitive advantage. A company's long-term success is driven largely by its ability to maintain a competitive advantage - and keep it. Powerful competitive advantages, such as Coca Cola's brand name and Microsoft's domination of the personal computer operating system, create a moat around a business allowing it to keep competitors at bay and enjoy growth and profits. When a company can achieve competitive advantage, its shareholders can be well rewarded for decades. 

Harvard Business School professor Michael Porter, distinguishes between strategic positioning and operational effectiveness. Operational effectiveness means a company is better than rivals at similar activities while competitive advantage means a company is performing better than rivals by doing different activities or performing similar activities in different ways. Investors should know that few companies are able to compete successfully for long if they are doing the same things as their competitors.  Professor Porter argues that, in general, sustainable competitive advantage gained by: A unique competitive position Clear tradeoffs and choices vis-à-vis competitors Activities tailored to the company\'s strategy A high degree of fit across activities (it is the activity system, not the parts, that ensure sustainability) A high degree of operational effectiveness

A BRIEF INTRODUCTION TO VALUATION  

While the concept behind discounted cash flow analysis is simple, its practical application can be a different matter. The premise of the discounted cash flow method is that the current value of a company is simply the present value of its future cash flows that are attributable to shareholders. Its calculation is as follows: 

For simplicity's sake, if we know that a company will generate $1 per share in cash flow for shareholders every year into the future; we can calculate what this type of cash flow is worth today. This value is then compared to the current value of the company to determine whether the company is a good investment, based on it being undervalued or overvalued. 

There are several different techniques within the discounted cash flow realm of valuation, essentially differing on what type of cash flow is used in the analysis. The dividend discount model focuses on the dividends the company pays to shareholders, while the cash flow model looks at the cash that can be paid to shareholders after all expenses, reinvestments and debt repayments have been made. But conceptually they are the same, as it is the present value of these streams that are taken into consideration. 

As we mentioned before, the difficulty lies in the implementation of the model as there are a considerable amount of estimates and assumptions that go into the model. As you can imagine, forecasting the revenue and expenses for a firm five or 10 years into the future can be considerably difficult. Nevertheless, DCF is a valuable tool used by both analysts and everyday investors to estimate a company's value. 

For more information and in-depth instructions, see the Discounted Cash Flow Analysis tutorial. 

RATIO VALUATION 

Financial ratios are mathematical calculations using figures mainly from the financial statements, and they are used to gain an idea of a company's valuation and financial performance. Some of the most well-known valuation ratios are price-to-earnings and price-to-book. Each valuation ratio uses different measures in its calculations. For example, price-to-book compares the price per share to the company's book value. 

The calculations produced by the valuation ratios are used to gain some understanding of the company's value. The ratios are compared on an absolute basis, in which there are threshold values. For example, in price-to-book, companies trading below '1' are considered undervalued. Valuation ratios are also compared to the historical values of the ratio for the company, along with comparisons to competitors and the overall market itself. 

CONCLUSION

Whenever you're thinking of investing in a company it is vital that you understand what it does, its market and the industry in which it operates. You should never blindly invest in a company. 

One of the most important areas for any investor to look at when researching a company is thefinancial statements. It is essential to understand the purpose of each part of these statements and how to interpret them. 

Fundamental Analysis - Resource Availability

ERP-01 Energy and Natural Resources 

Energy and natural resources are the life blood of manufacturing. Manufacturers need adequate, secure and affordable energy and raw materials to compete in the global marketplace. The NAM supports appropriate government policies, including the development of a national energy policy that would provide a climate conducive to exploration, development and efficient utilization of all domestic energy resources and would encourage development of public lands in a manner consistent with sound environmental management. Reducing America's dependence on non-domestic energy and natural resources is prudent and desirable. The NAM supports an “all-of-the-above” approach to energy, including recognition of the importance of energy efficiency to meeting future energy demands.

Manufacturers use a significant amount of the energy in this country and have long recognized the importance of energy efficiency to their operations. Providing additional energy to support a desired growth in manufacturing will require large capital investments by the private sector. The ability of the energy-producing and energy-consuming segments of industry to obtain adequate funding for energy-related investments must not be impaired by government policies. Government should not be in the business of picking winners and losers. The NAM will identify and oppose overly restrictive regulations and the implementation of policies that limit or eliminate energy sources and production.

The NAM supports significant investments to modernize the national utility grid and utilize smart metering, distributed storage and other advanced technologies to improve efficiency, affordability, reliability and security.

The NAM is committed to protecting the environment and to environmental sustainability. The NAM supports government policies that promote innovation and recognize that technological advances over time have reduced the environmental impacts of energy production and consumption. Moreover, the NAM encourages policies that recognize these technological advances, allow for a proper balance between economic growth and the protection of our environment, and take into account future challenges, including those posed by climate change.  

1.01. Oil and Natural Gas 

Our nation's domestic oil and natural gas supply represents an important factor in our energy future. In today’s global economy, U.S. manufacturers must be assured of an adequate supply of competitively priced oil and natural gas for industrial and commercial use, such as petrochemical feed-stocks, process gas uses and transportation fuels, and for power and steam generation. 

1.01a. Liquefied Natural Gas

The dramatic increase in the domestic natural gas resource base has reduced the likelihood of the need for significant Liquefied Natural Gas (LNG) imports. Some now believe the U.S. could eventually become a net exporter of natural gas. An adequate supply of natural gas is needed to meet the growing demand of the U.S. manufacturing sector in a recovering economy. The NAM strongly supports federal and state policies to accommodate growth in domestic natural gas production. We further believe abundant domestic natural gas resources can fuel a renaissance in U.S. manufacturing. The NAM fundamentally supports free trade and open markets. We support a natural gas policy process that is open, transparent and objective. 

1.01b. Production

Oil There are abundant oil and natural gas resources in the United States. Domestic demand for energy resources continues to increase. For manufacturers, a balance between supply and demand is important to assure competitive, stable prices. The NAM supports policies that promote the leasing, exploration and development of the nation's oil and natural gas resources in an environmentally sound manner. Exploration and development of promising areas onshore, offshore and in the Arctic can substantially lower our nation's energy vulnerability with minimal environmental impact. The emergence of hydraulic fracturing technologies has made the extraction of shale gas and shale oil more technically feasible and more cost-effective. The development of Canadian oil sand and shale gas resources is also providing increasingly important sources of energy for American manufacturers and consumers. These new sources of gas and oil will have a significant positive impact on this country’s ability to meet its feedstock and energy needs.

As is currently the case for states with onshore production from federal lands, and for Gulf Coast states with production from federal waters off their coasts, all states with federal offshore leasing and production should share in related federal revenues. 

1.01c. Refining Petroleum Products

The refining industry is one of America’s largest manufacturing sectors, and refined petroleum products play a critical role in meeting domestic transportation fuel demands. U.S. refineries process crude oil into products such as gasoline, distillate and jet fuels, heating oil and chemicals for domestic use and for export into world markets. U.S. refiners have responded to the call for a cleaner environment by producing cleaner fuels, such as reformulated gasoline, at competitive prices. Uninterrupted production of these products and the transportation infrastructure necessary to deliver them are essential to our national energy and economic security as well as to U.S. industry's ability to compete globally.

1.01d. Natural Gas and Manufacturing

Industry relies on natural gas for much of its energy needs and as a raw material. The NAM believes policies that encourage the cost-effective use of natural gas to grow American manufacturing should be encouraged.

The U.S. economy relies on natural gas for much of its energy needs and as a feedstock for commercial products. Natural gas is and will remain an important manufacturing commodity because of its scalability, affordability, versatility and efficiency. The NAM supports policies at the federal and state level that facilitate the responsible and expeditious development of natural gas resources, allowing these benefits to contribute to America’s economic recovery and to accrue for energy consumers.  

1.02. Coal

Coal is the most abundant energy resource in the United States and is a vital part of our efforts to meet our energy and transportation needs. The NAM believes increasing the utilization of advanced clean coal utility and industrial generation technology as well as expanding coal-to-gas and coal-to-liquid technologies in an environmentally sound manner is an appropriate and desirable national policy. Coal generates a significant percentage of our nation's electricity, and maintaining coal in a diverse national energy portfolio is in the national economic interest. Government actions that unreasonably increase the cost of production and use of coal for limited environmental or health benefits are counterproductive. Laws and regulations governing air, water and solid waste quality are currently the most crucial restraint on the use of coal by industry and utilities. Environmental policies should be reviewed and applied in a manner that balances reasonable environmental objectives with the need to have a diverse fuel portfolio, including continued cost-effective coal use. 

1.02a. Production from Federal Lands

The NAM supports policies that promote the leasing, exploration and development of the nation's coal resources in an environmentally sound manner. These are national resources on public lands, and they are vital to this country’s economic growth. The NAM opposes efforts to unnecessarily restrict access to these national resources. Coal leasing programs, which have historically been sporadic, have limited the potential mining of billions of tons of coal that lie beneath federal lands. A long-term, stable and flexible leasing policy should be maintained to ensure the availability of federal coal reserves to contribute to our nation's energy needs. The NAM therefore supports streamlining and expediting coal leasing under the Federal Coal Leasing Amendments Act.  

1.02b. Carbon Capture (CCS and CCUS)

The NAM supports continuing research, development and demonstration of carbon capture, beneficial use and storage (CCUS) technology. The NAM also supports expeditious research, development and demonstration of carbon capture use or storage (CCS) technology. (See ERP-02 1.13 for NAM climate change principles.)  

1.03. Alternative Energy Sources

A free market energy policy is the best way of encouraging economically sustainable alternative energy options. Government can play a positive role in support of the research and development of alternative energy sources. The NAM opposes federal government mandates for use of alternative energy sources. Policies that mandate the commercial use of non-traditional energy sources before they are economically competitive are inefficient and impose unnecessary costs on our society.  

1.03a. Clean, Renewable and Non-Traditional Energy Sources

The NAM supports policies that encourage an energy mix comprised of renewable energy resources and other power options and allows energy efficiency measures but does not support mandating specific technologies or portfolio standards. Clean and renewable energy resources such as wind, solar, geothermal, hydro, landfill gas, municipal solid waste (excluding paper which is commonly recycled) and sustainable biomass provide alternatives to traditional fossil fuels. Together these resources account for a steadily rising share of U.S. energy supply and development. The NAM encourages Congress to review clean and renewable energy resources to ensure that policies avoid potential adverse impacts on users of renewable feed stocks, agricultural and forest resources. These incentives should not create winners and losers in the quest for developing renewable fuels. In establishing federal renewable energy policies, the NAM encourages Congress to recognize regional differences in renewable energy resource availability, and to not conflict with or pre-empt state programs already enacted. Development and utilization of non-traditional fuels and technologies will enhance energy flexibility and expand diversification of energy supplies. 

1.04. Transmission

The NAM supports a transparent, streamlined and timely federal permitting process for interstate electric transmission infrastructure. Cost-effective investments in transmission infrastructure to improve the reliability, capacity, efficiency and security of the electric grid promote a competitive wholesale electricity market which benefits residential, commercial and industrial rate-payers.  

1.05. Demand-Side Management (DSM) Programs, Energy Effciency Measures and Distributed Generation Resources

The NAM believes that the provision of cost-effective DSM services by individual customers and aggregators’ programs, energy efficiency measures, and distributed generation resources can help ensure a reliable and adequate electricity supply at a lesser cost. Investments in and opportunities for technologies and measures that enable customers and aggregators to provide such services should not be precluded. The NAM also believes that electric and natural gas utilities should not be precluded from meeting future electricity and natural gas needs with these technologies and measures. Utilities also must not be precluded from recovering prudently incurred costs when implementing these programs, measures and services, and non-discriminatory market opportunities for DSM services. 

1.06. Hydroelectric Power

Hydropower is a renewable resource that cannot easily be replaced. It does not deplete the nation's other fuel resources and contributes to U.S. energy self-sufficiency. Although hydro contributes a relatively small percentage of the nation's energy supply, it is a significant percentage of the renewable energy supply. It is energy efficient, with energy conversion efficiency in the range of 85-95 percent. The NAM supports the continued use and development of hydropower resources.

The NAM supports the streamlining of the regulatory process for hydroelectric power development through the elimination of redundant or contradictory regulatory steps and avoiding the imposition of conflicting clauses in other legislative initiatives such as those related to clean air, clean water and endangered species.

With regard to hydro projects owned and operated by the federal government itself, efforts to offset their impact on fish and wildlife (including Endangered Species Act initiatives) must be carefully balanced with the preservation of economic, recreational and public safety goals.  

1.07. Nuclear Energy

Nuclear power is a safe and vital source of cost-effective base-load electricity that does not emit criteria pollutants or greenhouse gases into the atmosphere. It is the largest source of non-emitting power generation in the United States and the second largest source of electricity, supplying approximately 20 percent of the nation's power. The NAM supports the continued development and operation of nuclear energy consistent with the protection of public health and safety.

Nuclear energy helps stabilize the price of electricity while maintaining a diversity of domestic fuel sources. As the demand for electricity in the U.S. continues to grow, the NAM supports the construction of additional nuclear power plants that have been approved by the Nuclear Regulatory Commission to maintain a diverse portfolio of generating resources. The NAM also supports advanced nuclear technology for use in manufacturing as a source of carbon-free process heat.

In supporting the continued use and development of nuclear energy in the United States, the NAM supports the construction and operation of facilities covering all parts of the fuel cycle and nuclear energy generation, including power plants, fuel enrichment facilities, fuel fabrication plants, low-level and high-level waste handling and disposal operations, and other related facilities critical to supporting and expanding the nuclear energy industry.

The NAM supports policies that allow the federal government to fulfill its legal obligation to remove used fuel from commercial nuclear power plants and manage its long term disposal. We support the research, development and demonstration of technologies to close the fuel cycle while a permanent disposal facility, which is needed even if the fuel cycle is successfully closed, is developed. The NAM encourages the development of interim storage facilities for consolidating used fuel until recycling or permanent disposal facilities, or both, are available.  

1.08. Energy Efficiency

Manufacturers are committed to reducing our energy intensity and producing more energy efficient consumer products to help reduce the U.S. demand for energy, save money, lower costs and lessen greenhouse gas emissions. American society has much to gain from sensible efficiency and waste reduction measures across all sectors of the economy. 

1.08.a Industrial Energy Effciency

Manufacturers use one-third of our nation’s energy and are directly affected by the cost of energy in making products as well as by the cost of maintaining office operations. It is widely acknowledged that process and building system energy efficiency and conservation offer immediate and cost-effective opportunities to reduce energy cost inputs, reduce water use, stretch available energy supplies and decrease greenhouse gas emissions.

Manufacturers have taken the lead in making energy efficiency a priority. Improvements in energy efficiency in the manufacturing sector have helped the country to be more efficient in energy use per unit of GDP and reduced the energy intensity of the U.S. economy. Manufacturers have achieved greater energy efficiency through cost-effective distributed generation, combined heat and power technologies, waste heat recovery systems, water reuse and recycling, intelligent energy systems such as advanced metering infrastructure and demand response, and improved process manufacturing.

The most significant federal actions to increase industrial energy efficiency in the long run are those that will create a positive climate for capital investment and energy services investment for new and existing plants and equipment.

The NAM supports the use of favorable capital cost recovery tax policies including first year expensing (see TDEP-01 1.02a) for capital investment.

There is an important federal role to be played in basic research and development of new high-risk energy efficiency and waste minimization technologies in energy intensive industries, particularly where private sector incentives maybe inadequate.

There is also a clear federal role for supporting and incentivizing small and medium businesses in the use of proven energy management technologies, practices and services.

The NAM believes that previous overly prescriptive federal energy policies have failed in large part because cost-effective industrial energy efficiency improvements cannot be mandated. Industrial energy management is a complex moving target that includes process innovation, long-term quality planning, energy assessments of building and equipment purchases, linkage of water and energy efforts, employee awareness, and waste minimization and recovery.

The NAM supports voluntary industry and market-driven benchmarking of industrial facilities and processes for the purposes of raising the level of awareness of best-in-class energy management possibilities. The NAM opposes the imposition of mandatory data collection programs unless there is a clear justification of the need for the data, as well as complete protection of proprietary data. The federal role should be limited to supporting industry in the development of voluntary information exchanges.

The NAM also opposes the imposition of mandatory industrial energy efficiency targets. Federal energy efficiency targets would have no meaning to most companies because manufacturing energy consumption varies dramatically from plant to plant. Product demand, weather, water availability, fuel price swings and capital investments, such as pollution control technology, influence manufacturing energy consumption.

The NAM supports federal programs that encourage and help manufacturers, especially small and medium-sized manufacturers, to understand and deploy energy efficiency and energy management measures for the purposes of becoming more competitive in a global marketplace. 

1.08.a High Performance Buildings

Manufacturers Manufacturers play a significant role in improving the efficiency of commercial and residential buildings. Since the building sector consumes approximately 40 percent of all energy used in the United States, the NAM supports market, regulatory and institutional reforms that increase opportunities to better utilize energy efficiency in buildings. Improving building efficiency should start in the federal government, which is the largest owner of building inventory in the country. The NAM supports policies to enhance private sector investment in public building efficiency improvement projects, as well as policies that strengthen standards for existing commercial, industrial and residential buildings.

In addition, since residential and commercial building improvements are often generated by obsolete infrastructure and involve large capital expenditures, the NAM supports providing favorable capital cost recovery tax policies, including first year expensing. (See TDEP-01 1.02a.)

Finally, the role of cooperative government-industry initiatives will be crucial in developing innovations that transform current construction and retrofit methods into an approach that fully integrates energy efficiency. As such, the NAM supports public-private efforts to engage the building industry and promote the development of a workforce that will shape the next generation of commercial and residential buildings. Hand-in-hand with this is the development of techniques to maintain efficiency through the lifespan of buildings, including energy audit systems and techniques and best practice-sharing of both. 

1.09. Climate Change

The NAM and our member companies are committed to protecting the environment through greater environmental sustainability, increased energy efficiency and conservation and reducing greenhouse gas emissions believed to be associated with global climate change. We know the U.S. cannot solve the climate change issue alone. The establishment of federal climate change policies to reduce greenhouse gas emissions, whether legislative or regulatory, must be done in a thoughtful, deliberative and transparent process that ensures a competitive level playing field for U.S. companies in the global marketplace.

Therefore, the NAM opposes any federal or state government actions regarding climate change that could adversely affect the international competitiveness of the U.S. marketplace economy. Any climate change policies should focus on cost-effective reductions, be implemented in concert with all major emitting nations, and take into account all greenhouse sources and sinks. The NAM believes that federal climate policies generally should pre-empt state policies.  

1.10. Natural Resources

U.S. manufacturers require access to natural resources, such as rare earth elements and other critical materials in order to produce products that are vital to the U.S. economy. Moreover, these resources are essential for the U.S. to remain competitive in the global manufacturing economy. Competition for raw materials should be market-based and not distorted by unwarranted or biased government action. The NAM supports government policies and actions that allow manufacturers access to these vital resources, support R&D, encourage the domestic mining and processing of such resources, and support unimpeded trade thereof. Additionally, the NAM supports reasonable reform of the Mining Law of 1872 that recognizes regulation of the mining industry under existing comprehensive environmental laws and compensates the federal treasury at royalty rates based on mineral values.

Fundamental Analysis - De-Mat Stocks

ARE ENTIRE STOCKS PRESENT IN DE-MAT FORM ?   

Now-a-days after the Internet Boom, stock Trading and all types of Transactions were performed only in Electronic form with the help of Fully Computerized Automated Software’s too, everything present in De-Mat form.

DEMATERIALISATION ! 

1. Can I dematerialize all my depository eligible securities through the same account?

Ans. Yes. You can choose to have all your securities deposited in a single account provided that the securities have the same holders.

2. Can I dematerialize shares, which are pledged with a bank, which is a DP as well?
Ans. Yes, you can, with the permission of the bank with whom such shares are pledged.

3. Can odd lot shares be dematerialized?
Ans. Yes, Odd lot share certificates can also be dematerialized.

4. How do I demat shares with Pre-Marital / Maiden names?
Ans. In such cases you need to submit a certified true copy of the marriage certificate along with the Demat Request Form (DRF), when you give your shares for dematerialization. Also provide an attested new specimen signature.

Fundamental Analysis - Mortgaging Of Stocks

PROMOTERS MORTGAGING OF STOCKS IF ANY ?   

Mostly promoters of mid-and small-cap companies pledge large quantity of shares to borrow money. So, the chances of default on margin calls and the consequent selling by the lenders is high, said an analyst. 

He added that investors should try and exit small-cap companies in such cases, as the counters are very risky and these events accelerate sharp movements in these stocks. 

Fundamentally, strong companies may not see any impact on share price but many in the real estate and telecommunication sectors have seen extreme movements due to promoters pledging shares and investors are advised to sell shares.

HOW MUCH HAS BEEN PLEDGED ?

If the promoter holding is high at the time of pledging shares, investors should not worry even if they pledge more number of shares.

"But, if promoters are pledging over 30 per cent, investors should try and find out the reason behind shares being pledged," advises Thunuguntla. The good part is that promoters are only mortgaging their holding, not selling it.

You should be even more alert when promoters with lower holding (less than 15-20 per cent) in the company pledge 10 per cent or more.

SEEK THE PURPOSE !

"Promoters raise money by pledging shares to fund growth plans that should not deter investors.

"Many companies pledge shares to apply for shares under their rights issue, at a price same as other shareholders. This should give confidence to investors, said Dedhia.

But this comes with a warning. Many promoters also pledge because they lost money due to bad business decisions or speculative tradings. The funds were raised to make up for it.

"It shows the liquidity condition of promoters is not very healthy and investors may want to exit such counters," said Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities.

For retail investors, this bit of information is difficult to find.

If the company is pledging more shares with the financier because of the fall in share prices, there could be warning bells. Financiers keep the shares as collateral.

So, whenever the share price goes down, the promoter is either suppose to part pay the loan or pledge more shares. If the promoter cannot oblige, the lender can offload the shares in the market.

Fundamental Analysis - Promoters Shareholding Pattern

By June 2013, promoters of all listed companies in this country have to reduce their stakes to 75%. Various counts indicate at least 200 companies, including several government-owned ones, are far away from meeting the 25% minimum public shareholding mandate. The challenge is 3 fold - time is short but SEBI seems to be in no mood to relent and unless the government changes its mind, June 2013 is a hard limit.

The second challenge is the market environment - nobody can fix that. And the third issue is the lack of suitable dilution methods. Companies, their lawyers and bankers complain that by restricting the dilution routes to 3 acronyms - FPO, OFS and IPP- SEBI is being too prescriptive or restrictive.

SEBI Chairman UK Sinha told about this in response:

"People who are raising these issues they do not have their heart on diluting. I am levelling this allegation that if there are so many options available why can't you as a promoter reduce by 1%. Show me your intention, why is that intention not being shown? Just imagine there are 30 companies who are less than 10% and this rule has been in place since 2001. In last 11 years you didn't find any opportunity to dilute and you are as low as 2% how ill you reach 25%? Please show your intent, don't expect everything from SEBI. I am giving an assurance that we are willing but where is the action from your side, please do that. You will find us very responsive. If I find that companies are very keen and they are serious about diluting their stake then the manner in which they can divest or not divest that will not come in the way. We are looking at the entire thing in a fresh manner. Just because the avenues are limited that will not come in the way, we will provide them all the legitimate avenues."

So what are the additional avenues that India Inc wants in order to meet the 25% challenge. Joining me with their lists are Sanjay Sharma of Deutsche Bank, Somasekhar Sundaresan of JSA and Manan Lahoty of Luthra.

FII’s  shareholding pattern !

The sell-off by foreign institutional investors in government securities has finally caught up with the equity market. With the rupee close to its record low and the pressure on the currency expected to persist near term, fears are that FIIs will start pulling money out of Indian shares as well.

Stocks have been beaten down to a point where it may not make much sense for the long term players among FIIs to sell at these levels. However, short term players like hedge funds and exchange traded funds are another class of investor altogether.

These funds chase quick gains, and absolute price moves and currency swings matter more than fundamental factors. Beyond a certain threshold of tolerance, they will dump shares irrespective of the price.

The spotlight is now on the companies where FIIs increased their stake in the recent past (data is available only till the March quarter)

An analysis of the shareholding pattern of BSE-100 companies shows that foreign funds have hiked stake in nearly 50 companies by 1-9 percent between September 2012 and March 2103. So far this calendar, till May, foreign funds net bought around Rs 61,000 crore of shares. There is no way of knowing how much of the money has come from long term players like pension funds, insurers and India-dedicated funds, and how much from short term funds.

Source: Capitaline. % Chg is the price change from May 17 to June 20

Company	FIIs holding (Mar qtr)	FIIs holding (Sep qtr)	Inc in Holding	% Chg
Shriram Trans	49.45	40.97	8.48	-7.00%
Axis Bank	40.94	32.79	8.15	-19.10%
Suzlon Energy	13.13	5.43	7.7	-35.10%
IndusInd Bank	40.49	34.26	6.23	-12.10%
Federal Bank	45.93	39.89	6.04	-9.70%
Zee Entertainment	41.69	36.14	5.55	-6.10%
NTPC	9.37	3.95	5.42	-12.30%
Dr Reddy's Labs	29.66	24.52	5.14	0.00%
M & M	35.01	30	5.01	-4.50%
HDFC	73.67	68.72	4.95	-9.60%
Satyam Computer	30.35	26.01	4.34	5.80%
NMDC	4.76	0.66	4.1	-15.50%
HCL Technologies	24.32	20.31	4.01	5.50%
Adani Enterp	18.97	15.08	3.89	-22.30%
HPCL	9.75	6.24	3.51	-19.50%
Cipla	23.89	20.79	3.1	-10.70%

FOR EXAMPLE : The list is extending……….

Company	%Holding	Rs Crore	No. of Holders
HDFC	73.64	85,302	1,093
Winsome Diamond	58.6	34	24
IDFC	52.19	8,469	460
Tata Motors (D)	52.12	3,167	146
Strides Arcolab	51.74	2,435	108
Jain Irrigation	50.3	1,065	168
Shriram TransFi	49.74	7,273	400
Yes Bank	46.03	4,680	383
Federal Bank	44.34	2,410	210
Jubilant Food	44.02	3,061	140
South Ind Bk	43.75	1,196	69
Indiabulls Hsg	43.25	2,636	184
Zee Entertain	42.51	9,786	451
Apollo Hospital	42.43	5,389	347
Manappuram Fin	42.31	444	75
IndusInd Bank	42.28	8,288	308
United Spirits	42.06	13,812	479
India Infoline	41.85	640	70
Axis Bank	40.7	20,721	701
Infosys	39.55	67,256	745
ICICI Bank	39.22	39,614	1,075
Int Conveyor	38.82	27	5
Monnet Ispat	38.78	246	57
M&M Financial	38.16	5,122	218
United Phos	37.6	2,279	235
Redington	37.57	790	98
NCC	37.46	187	72
Hexaware Tech	36.21	1,280	137
Mcleod	35.96	1,085	148
SKS Microfin	35.83	476	42

* N.T Not Traded since last 15 days.