AAII Survey: What Type of Stock Analysis Is Usually Conducted and Why?

Despite many thousands of books written on market analysis and countless theories that attempt to explain the movement of stocks, there are, at heart, two main types of analysis: fundamental and technical. Fundamental analysis involves assessing the economic conditions that influence a stock’s price and the health of the company by looking at key ratios based on its financial statement data. Technical analysis involves analyzing past stock price action and from that deriving a predictive model for the future. The question “Which is better, technical or fundamental analysis?” has been frequently discussed; however, no clear winner has been named. We aimed this week to see what type of stock analysis AAII members were conducting and why.

We asked our members about their preferred approach to investment analysis with the question:

What type of analysis do you usually conduct in your investment decisions?

Here are the results:

875 members participated in this survey.

Given that most investors want to make the best investment decisions possible, it makes sense that a majority stated that they use both technical and fundamental analysis in their decision-making process. Additionally, it’s not surprising to see that only a small percentage of respondents (8%) only use technical analysis, especially given the number of indicators and greater amount of time needed to sort through technical metrics.

Follow-Up Special Question

Obviously, there are a number of variables that can be considered regardless of what type of analysis is used. Whether an individual investor looks at company-specific ratios, market volatility indicators or a combination approach, it is unlikely that very many investors are using identical metrics to make decisions. Therefore, we aimed to hear what specific metrics members were commonly using.

We followed up our poll with:

What is your go-to metric when making financial decisions, and why?

We received nearly 120 responses and, although a majority stated that it was difficult to select only one metric, we were able to group responses by the type of metric most named. More than 33% of respondents named the price-earnings (P/E) ratio or price-earnings-to-earnings-growth (PEG) ratio as their go-to metric; the reasons given included simplicity and the ability to get an overall picture of a company’s stock compared to its sector average. Twenty-four percent of respondents said that they most commonly looked at free cash flow (FCF) in their decision-making process, while 23% named dividend yield as their choice metric. Additionally, 12% of respondents mentioned momentum indicators first, and 8% stated that they most frequently used debt relative to equity in their analysis.

Here is a sampling of the responses we received to the follow-up special question:

• “Free cash flow, which reveals the sustainability of and the ability to raise the dividend.”
• “The forward PEG ratio. It’s the only metric that considers forward price-earnings estimates in relation to five-year earnings per share (EPS) estimated growth rates. It’s better than nothing. Trailing price-earnings is useless, as the stock price is based on the prospects, not what has happened in the past. The forward PEG ratio has a lot of problems, but I find it to be the best indicator of future stock price movement for any publicly traded security.”
• “Understanding company leadership and their competence and the story they tell of the company.”
• “After looking at all the metrics, I always come back to dividend yield to see where that fits with all the other analyses. I am always looking for current dividends and potential future dividends based on a fair price for the equity.”
• “Statement of cash flows. It not only tells me about the financial health of a company from a quantitative perspective, but also tells me a little about the culture of the company regarding whether they have a conservative approach to their finances.”
• “I consider all the data, both technical and fundamental. Lately, I’ve taken a strong interest in companies that have consistently paid and raised dividends for a long period of time. I also look at companies that beat their earnings and revenue estimates and raise future estimates.”