Commodities investing is still fundamentally sound basketball

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His fund holds gold-related stocks as well as other commodities-related shares that he believes will benefit from a weak dollar. But there is a point of view from which it is not good, and that is it decreases the value of our currency on a consistent basis and sometimes at an accelerated rate. That is all lost purchasing power in our currency. We are in a lose-lose situation. The decline in the value of our currency is directly inflationary.

Lost purchasing power is inflation. The bigger risk is that, at some point, the large holders of U. This is a very challenging set of conditions for us. Something the world is going to want now is a currency alternative. An investment I have felt positive about but now feel dramatically more positive about is gold. Gold is probably the single most important investment that most of us can have a representation in. In , investors would line up outside banks to buy gold. Today the average investor is much more interested in Google or Apple.

If the dollar continues to deflate as the Fed pumps unlimited liquidity into the credit markets, the average investor may begin to realize dollar-denominated assets are not the safe harbor they once were. Public Not Significantly Involved in Gold The metals bull market will likely not end until there is wide public acceptance, which is not yet on the radar screen.

Before that happens other factors are likely to push the market forward. Those would be 1 continued de-hedging by larger gold hedgers such as Barrick, 2 new demand from China, Russia and Middle Eastern Sovereign Wealth Funds, and 3 much greater institutional participation around the globe. As in all bull markets, the public jumps in at the end, creating a final top.

Rogers Still Long Commodities From a broader commodity perspective, legendary investor Jim Rogers recently gave an interview to Fortune Magazine from his new home in Singapore. Rogers believes the US will suffer a significant recession, but the commodity secular bull is far from over. More like a cyclical correction in the middle of a long-term bull market.

Remember the old expression: 'Dr. Copper is the best economist in the world. Nickel and Dr. Zinc figured out a few months ago what I thought I had figured out, that we were going to have a recession. Other commodities may fall more. But I don't see the economics of agriculture being much affected at all. Maybe there will be a few less cotton shirts bought. Maybe there will be a few less tires bought.

But the supply is under more duress than the demand. And everybody said, 'Well, that's the end of the gold market. It was just a fluke. It's over. This is what happens in markets. But the fundamentals of the secular bull market in commodities are not over any more now than they were for gold in the '70s. He says he hasn't covered his short positions on the investment banks or Citigroup and won't for a while.

The long term fundamentals eventually emerge and will both reward and punish the markets based on supply and demand factors, not self-interest or wishful thinking. For long term investors who understand the underlying fundaments, staying the course through the storms of volatility will likely be rewarded as the commodity bull runs its course. I found it one of the hardest things to learn. The Net Profit is also generally increasing even though the increase fluctuates somewhat.

Again, not too many companies will increase their net profits every single year and most companies will record a small loss every so often. The general trend here is up and this satisfies the second test. Even the best companies will record a losing year every so often The Net Margin is satisfactory with an average of 7.

While the Net Margin is relatively low, this is fairly typical of companies which operate in industries which are capital equipment heavy such as the manufacturing industry. The Net Margin satisfies the third test. The Current ratio measures the company's working capital position. The Current ratio is more than 2 which indicates the company has sufficient working capital. The Current ratio is fairly consistent from year to year and this satisfies the forth test. The Debt Assets ratio shows the companies long-term debt level.

This satisfies the fifth test. Since all five tests were satisfied, this company is considered to be fundamentally sound. Table 2. This indicates that the company is either receiving increased competition or that the industry it belongs to is struggling. A quick check of the revenue figures from its competitors will reveal the source. While the revenue is not increasing, the company still has revenue which is fairly consistent and this satisfies the first test.

The Net Profit is positive on all five years but it is not increasing which is due to its revenue not increasing. The Net Profit is however fairly consistent and this satisfies the second test. The Net Margin is also fairly consistent over the years but is quite low with an average of 3.

Even though the Net Margin is low, it is consistent and does not show a declining trend. This satisfies the third test. The Current ratio shows a declining trend and is heading towards 1. This company is running out of its working capital and this is going to cause financial problems in the near future as the company will no longer have sufficient cash to finance its operations.

This company fails the forth test. The Debt Assets ratio is very high which in itself is not a major problem; however the Debt level is increasing year after year without any corresponding increase in net profit. This company also fails the fifth test. This company failed the last two tests and is therefore not considered to be fundamentally sound. Summary If five years of data is not providing a conclusive opinion due to a volatile revenue and earnings history then ten years of data may be more appropriate to analyze.

Having performed these checks with five years of data should normally give the stock investor a pretty good idea of the financial position of the company. If the company passes all of the above five tests then the company is in all probability fundamentally sound.

This however does not guarantee that the company will not run into financial difficulties in near future, but the odds of this occurring are low. It should be noted that just because a company is considered fundamentally sound it does not necessarily mean it is a good investment. There are additional checks which can be made if required. A probability indicator such as the Z-score measures the likelihood of a company heading into bankruptcy within two years.

This provides a useful supplementary analysis but it is based on probability. The indicator is only a guide and there is no guarantee that a company will not go bankrupt in the future even if the indicator suggests a low probability. The above tests provide the stock investor with a guide to quickly determine the fundamental soundness of a company.

While these tests may exclude some companies which are in reasonably good financial shape, the tests do exclude those stocks which are not financially sound. Financial Ratio Analysis The basis for fundamental analysis At the heart of fundamental analysis are the financial ratios which allow the stock investor to evaluate a company's financial performance based on data taken from the financial statements.

The basic financial ratios such as the earnings per share growth rate, price earnings ratio, price earnings growth rate and the dividend yield provide the beginner investor with an introduction to basic idea behind financial ratio analysis. These ratios form the basis for analyzing a company's earnings and are based on the company's income statement.

There are some additional ratios that deal with the company's revenue and earnings which provide a more complete analysis of a company's ability to generate a profit. These additional earnings ratios are broadly grouped into Revenue based ratios and Earnings based ratios.

For the stock investor to fully benefit from fundamental analysis they need to perform a more through analysis which deals with the company's balance sheet and these ratios can be broadly group into Asset based ratios.

While analyzing the revenue and earnings of a company provides valuable information regarding its profitability, information taken from the balance sheet provides valuable information on a company's ability to maintain its profitability. The main purpose of using fundamental ratios is that they allow the stock investor to quickly determine the current financial status of a company.

This allows the stock investor to determine whether a proposed investment is an investment in a company which is fundamentally sound or not and whether it's a bankruptcy risk. The analysis reports in the Analysis Techniques section gives investors practical experience using fundamental analysis on actual companies with instructional guidance.

Generally the information contained in the financial statements is readily available in a summarized form and the fundamental ratios are often already calculated. To truly benefit from the use of fundamental ratios it is beneficial to understand how these financial ratios are calculated. The information is available in a summarized form with the fundamental ratios already calculated Some stock investors feel that analyzing a company's financial position using fundamental ratios is something best left to accountants.

While it is true that accountants produce the financial statements, websites such as Yahoo Finance extract the information provided in these financial statements and provide them in a summarized format along with the fundamental ratios already calculated. This summarized information is explicitly intended for stock investors so that they can make an informed investment decision regarding that company.