Lesson 6: How to analyse a stock
What actually drives long-term performance? Charts tell you how price is behaving. Fundamentals which include things like how much a company is generating in revenue, tells you why a business deserves capital.
You don’t need to become an accountant. But you do need to understand what moves value over time because in the long run, price follows earnings and earnings follow business quality.
What does a stock really represent?
When you buy a stock, you’re buying:
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A stream of future cash flows
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Management’s ability to allocate capital
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The market’s future expectations
The chart shows perception. The financials show substance and we think both matter greatly when you're investing in companies or just trading them in the shorter term.
The three core drivers of stock performance - and share price moves
There are various ways to look a how a stock will move in the longer term but ultimately they are influence by three key elements.
1. Growth
Revenue expansion is fuel.
Questions to ask:
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Is revenue growing consistently?
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Is growth accelerating or slowing?
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What’s driving it: price increases, volume changes, or acquisitions?
Growth alone isn’t enough. It has to be profitable growth. Sometimes the market will rewards stocks that are pre-profit (ie. they're yet to make any 'actual cash'). The stock might be rising in anticipation of future growth and ultimately the expectation that they'll become profitable - Recently we've seen companies like Palantir (PLTR) be in this situation. Before February 2023, they'd not recorded a profit - after that period, they become profitable and their share price exploded higher over a three year period.
2. Profitability
Revenue is vanity. Profit is survival.
Key concepts:
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Gross margin - How much money is left after making the product - so a reflection of how strong the product is
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Operating margin - How much money is left after running the business - so a reflection of (how efficient the business is
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Free cash flow - The real money left over - companies will then use this to reinvest, buy back their own shares, or pay out a dividend.
Companies with strong margins have:
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Pricing power
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Competitive advantage
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Resilience in downturns
3. Valuation
A great company can still be a bad investment - if you overpay. For example if you bought Microsoft at the peak in 2000, it took around 15 years for it to recover to its old high. Overpaying can lead to long periods of 'dead money' and your portfolio taking a hit.
Valuation asks:
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What are you paying for future growth?
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Are expectations already high?
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Is the stock priced for perfection?
Markets don’t reward “good”. They reward better than expected.
You can find these data points on free resources like Yahoo Finance. Or if you want to get paid subscriptions, good starting points are places like Stockopedia or SharePad.
Earnings reports (why price moves strangely)
You’ll often see:
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“Great results” → stock down
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“Missed estimates” → stock up
That’s because markets price expectations, not reality.
If a stock has run hard into earnings:
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Good news may already be priced in.
If expectations are low:
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Mediocre results can cause rallies.
Always ask, what did the market expect? There are various news websites that will show what the estimated earnings or revenues are ahead of the release. At FoundryStrat, we like to use Stockopedia and TradingView.
Competitive advantage (moats)
Long-term winners usually have:
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Network effects - think of Visa: This is a classic two-sided network: More consumers carry Visa, More merchants accept Visa, More consumers want Visa, Both sides reinforce each other.
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Brand strength - think of Coca-Cola: ok not everyone loves Coke, but their brand carries a highly recognisable brand across the world.
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Switching costs - think of Apple: it's not just the actual cost of switching to another operating system but also the mental cost. Most people don't switch around too much if they find a product they really like.
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Cost advantages - think Costco: people that shop here love it, you can get great deals at excellent prices. People buy into the club and are compelled to be regular customers.
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Unique intellectual property - Think of Nvidia: they make all the GPUs that are powering the AI revolution - it's not just chips, it's the years and years of R&D that go into creating incredible products.
Without an edge, growth fades and markets eventually punish commoditised businesses.
Capital allocation
Management matters.
Look for:
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Sensible reinvestment
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Disciplined acquisitions
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Share buybacks at the right time
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Avoidance of unnecessary dilution
Good capital allocation compounds returns. Bad allocation destroys them quietly. The leading management teams or CEOs that have great track records like Jenson Huang at Nvidia or Alex Karp at Palantir are great examples of backing excellent management teams.
When fundamentals and price disagree
Sometimes:
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Fundamentals look strong
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But price trends down
That’s information! That's why we follow price so closely at FoundryStrat.
Either:
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Expectations were too high
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Or something is changing
Price weakness often leads fundamental deterioration. Respect the message.
A simple stock analysis checklist
Before investing, ask:
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Is revenue growing sustainably?
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Are margins stable or expanding?
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Is valuation reasonable relative to growth?
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Does the company have a durable advantage?
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Is price aligned with the story?
If both fundamentals and price/structure align, conviction increases and it makes it much easier to invest or trade in businesses. We have a list of companies that we hold, hopefully forever, but in reality a really long time. If those companies are exceptional and the fundamentals are great, but price perhaps becomes a bit too stretched, we don't need to worry, because the business is solid. We have seen this with Palantir. It can go through periods where price falls 50% in relatively short periods. Sure, you can trade around this, but as a long-term holding, it's been a great investment.
Investors vs traders
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Traders care more about momentum and structure
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Investors care about business quality, valuation and future growth
The best operators understand both. They don’t ignore price. And they don’t ignore business reality.
What’s next
There's literally thousands of books and endless content online about how you analyse a business. This is intended to be very high level - if you want to delve a little further, go and read The Zulu Principle by Jim Slater (Investing), or William O'Neil's How to Make Money in Stocks (more trading orientated but gives good Fundamental insights). Now that you can think about how to analyse an individual stock, the next question is:
Should you even be picking stocks at all?