Figure 1: An article on Apple’s valuation by The Wall Street Journal.

You’ve probably come across headlines like the one above (see Figure 1)—”Apple hits record highs” or “Analysts predict massive valuations.” It makes you wonder, right? Is this the perfect time to jump in and invest? Or maybe it’s time to cash out? If you’ve asked yourself similar questions during your investing journey, you’re not alone.

This is exactly where stock analysis becomes an invaluable skill. It helps you cut through the noise, evaluate the real potential of a stock, and make informed decisions.

And when it comes to the US stock market, where opportunities are vast and varied, mastering stock analysis is even more crucial.

That’s what this guide is here for—to walk you through the key strategies for analyzing US stocks and help you assess their return potential like a pro.

Let’s get started!

Types of Analysis in the Stock Market

When it comes to analyzing US stocks, two main approaches dominate the field: Fundamental analysis and Technical analysis. These methods are crucial because they cover the broad spectrum of what drives stock prices, helping investors make informed decisions.

• Fundamental Analysis: This approach focuses on evaluating a company’s financial health and intrinsic value by looking at factors like revenue, profits, assets, liabilities, and overall business performance. It’s about understanding “what the stock is worth” based on the company’s underlying fundamentals. Fundamental analysis is essential for long-term investors looking to determine if a stock is overvalued or undervalued.
• Technical Analysis: On the other hand, technical analysis examines price movements and trading volumes using charts and patterns. It’s focused on “when to buy or sell” based on historical data and market trends, making it particularly useful for short-term traders.

Together, these two methods encompass both the financial health of a company (fundamentals) and market behavior (technical patterns), giving you a well-rounded view of a stock’s potential. Understanding both approaches is key to developing a complete investment strategy.

Key Tools and Concepts in Fundamental Analysis

When evaluating a company like Apple, four critical components of fundamental analysis provide insight into its financial health and market positioning: Financial Statement Analysis (FSA), Valuation Ratios, Economic Indicators, and Industry and Competitive Positioning. 

Let’s break down these key concepts with an example and why they matter.

1. Financial Statement Analysis (FSA)

Why Analyze This?

Financial Statement Analysis is key to understanding a company’s financial health. It scrutinizes three crucial documents: the Income Statement, which outlines a company’s revenues, expenses, and net income to illustrate operational efficiency over a specific period; the Balance Sheet, which shows a snapshot of the company’s assets, liabilities, and shareholders’ equity at a particular moment, vital for assessing financial stability and investor equity; and the Cash Flow Statement, which tracks the cash inflows and outflows from operating, investing, and financing activities, crucial for evaluating the company’s liquidity and ability to meet financial obligations. Together, these statements provide a holistic view of a company’s financial health, aiding investors, analysts, and creditors in making informed decisions.

Investors can use Vested’s functionality (Log in > US stocks and ETFs > Search for a particular stock > Fundamental data) to access and analyze this data for any US stock, including detailed financials.

Key Things to Look For: 

• Revenue Growth: Steady increases in revenue often indicate growing demand for a company’s products or services. For example, Apple’s 5-year revenue trend shows consistent growth, reflecting strong market demand.
• Net Income: This reveals how profitable the company is after covering all its expenses. Apple’s robust net income shows its ability to manage costs and generate significant profit.
• Earnings Per Share (EPS): EPS shows the company’s profit per share. It demonstrates the amount of profit allocated to each outstanding share.
• Assets vs. Liabilities: Comparing assets to liabilities helps assess the company’s stability. A higher ratio of assets, as seen in Apple’s balance sheet, indicates financial strength.
• Cash Flow Trends: Cash flow measures the net amount of cash and cash equivalents moving in and out of a business, reflecting the company’s ability to generate and utilize cash effectively. Positive cash flow indicates an increase in a company’s liquid assets, which enables it to pay off debts, reinvest in its operations, distribute returns to shareholders, and maintain a cushion for future financial needs. This metric is essential for evaluating a business’s health and operational efficiency. For example, Apple’s cash flow statement reveals a positive cash flow from operations, supporting its ongoing activities and future investments—key factors for its long-term sustainability.

2. Valuation Ratios

Why Analyze This?

Valuation ratios are vital for assessing a stock’s value. They help determine if a stock is fairly, over, or undervalued based on its financial performance. These ratios help you make more informed decisions about whether a stock is worth buying at its current price.

Key Things to Look For:

Figure 2: Valuation Ratio of Apple compared with Google

• Price-to-Earnings (P/E) Ratio: This ratio compares the stock price to the company’s earnings. A higher P/E ratio, as in Apple’s case (see Figure 2), might mean investors expect high future growth. But, it can also signal overvaluation.
• Price-to-Book (P/B) Ratio: This ratio compares the market value to the book value of a company’s assets. Apple’s relatively high P/B ratio shows that the market places a premium on its assets, indicating strong investor confidence. If you want to learn more about P/E and P/B ratio, we have covered it in more detail here.
• Dividend Yield: This metric measures the return on investment from dividends in relation to the stock price. It’s especially useful for investors seeking to earn regular income from their investments, in addition to potential stock price appreciation. Dividends are payments made by a company to its shareholders from its profits, serving as a reward for their investment and providing a source of consistent income.

3. Economic Indicators

Why Analyze This?

Economic indicators, such as interest rates and GDP growth, offer insight into a company’s market. They greatly influence a company’s performance and stock price.

Key Things to Look For:

• Interest Rates: High rates raise borrowing costs, affecting profits. Apple’s strong cash flow means it relies less on borrowing, making it safer from these increases.
• Inflation Rates: Inflation raises costs but also affects pricing power. Apple’s strong brand lets it pass on costs to consumers, keeping demand steady.
• GDP Growth: Economic growth boosts consumer spending. This benefits companies like Apple that rely on consumer demand.
• Employment Rates: High employment increases consumer spending power. This, in turn, boosts revenue for companies selling consumer products.

4. Industry and Competitive Positioning

Why Analyze This?

Assessing a company’s market position and advantages shows its potential to keep or grow its market share. Firms with strong competitive barriers often succeed in the long run, even during tough times.

Key Things to Look For:

• Market Share: Companies like Apple, with high market share, enjoy more pricing power and brand loyalty.
• Competitive Moat: A company’s unique advantages, like Apple’s brand, technology, or scale, protect it from rivals. Apple’s ecosystem and loyal customers exemplify this.
• Innovation: Ongoing improvements, such as Apple’s focus on AI and new products, fuel growth and enhance its market position.
• Brand Strength: A strong brand boosts loyalty, leading to steady sales and successful new products.
• Cost Leadership: Apple’s efficiency in production, combined with high-profit margins, reinforces its pricing power and competitive edge.

Key Tools and Concepts in Technical Analysis

Figure 3: Technical Analysis Module for Stocks

Technical analysis is all about understanding stock price movements and market behaviour. Instead of focusing on a company’s financial statements, it relies on chart patterns, trends, and indicators to predict future price movements. For all US-listed stocks, Vested offers a module for analysis (see Figure 3). Once you search for a stock on the platform, it will be available for detailed technical analysis.

1. Charts

Why Analyze This?

Charts are graphical representations of a stock’s price movements over time. They are vital in technical analysis because they help traders visualize and understand how a stock’s price has fluctuated. Line charts, bar charts, and candlestick charts are the most commonly used types. Each chart type provides different levels of detail, with candlestick charts offering the most information (open, close, high, and low prices).

How to Analyze:

• Trends: By looking at charts, you can identify whether a stock is in an uptrend (where the price is rising) or a downtrend (where the price is falling). Spotting trends early helps traders align their strategies with market direction.
• Patterns: Certain price patterns, like head and shoulders, double tops, or ascending triangles, suggest potential reversals or continuations in a trend. Recognizing these patterns can help traders predict future price movements.
• Candlestick Formations: Candlestick patterns such as doji (which shows market indecision) or hammer (which may indicate a reversal) are key signals in technical analysis. They help traders anticipate short-term market direction.

2. Moving Averages

Why Analyze This?

A moving average smooths out short-term fluctuations in price data, providing a clearer picture of the stock’s overall direction. By averaging the stock’s price over a specific period (like 50 or 200 days), moving averages show whether the stock is trending upwards or downwards.

How to Analyze:

• Crossover Signals: Moving averages often produce buy or sell signals when short-term and long-term moving averages cross. For instance, when the 50-day moving average crosses above the 200-day moving average, it’s called a golden cross, signaling potential upside. On the other hand, a death cross (when the 50-day crosses below the 200-day) may signal a bearish trend.
• Trend Confirmation: Moving averages also confirm the strength of a trend. If the stock price stays consistently above its 50-day moving average, it’s generally a sign of an uptrend. Conversely, if it trades below, it might indicate a downtrend.

3. Support and Resistance Levels

Why Analyze This?

Support and resistance levels are key price points that represent areas of buying or selling pressure. Support is where a stock tends to stop falling, as buying interest increases, while resistance is where a stock tends to stop rising, due to selling pressure.

How to Analyze:

• Support Levels: When a stock reaches a support level, it usually signals strong buying interest. If the price consistently rebounds off this level, it may present a buying opportunity. However, if the stock breaks below support, it could signal further decline.
• Resistance Levels: Resistance levels occur where selling pressure prevents the stock from rising further. If a stock breaks above resistance, it can indicate a potential bullish move, as the stock may continue to rise once that barrier is crossed.

4. Volume Analysis

Why Analyze This?

Volume measures how many shares of a stock are traded during a given period. It indicates the strength or weakness of a price movement. Higher volume generally suggests strong market interest, while lower volume can indicate a lack of enthusiasm for the price move.

Key Things to Look For:

• High Volume with Price Movement: When a stock’s price rises or falls sharply with high volume, it means there’s broad market participation in that price movement. This supports the trend and makes it more likely to continue.
• Low Volume with Price Movement: Price moves on low volume may indicate a lack of conviction behind the move. This could signal a weakening trend or potential reversal, as fewer traders are involved in the price change.

Tools and Resources for US Stock Analysis

To effectively analyze US stocks, investors need various tools and resources to gather data and perform thorough analysis. Here are some essential resources:

Financial News Platforms:

Bloomberg and CNBC:Offer real-time market news and analysis. Bloomberg Terminal provides advanced analytics for investors.

Stock Screeners:

TradingView: Features advanced charts, custom screeners, and a community for investment ideas.

Trading and Investing Platforms:

Vested: A user-friendly platform for Indian investors to invest in US stocks, offering research tools, educational resources, and options for fractional investing.

Research Reports:

Morningstar and S&P Capital IQ: Provide detailed equity research, including financial analysis and value estimates.

Technical Analysis Tools:

StockCharts: Offers advanced charts, indicators, and educational content for improving analysis skills.

Economic & Market Data:

FRED, BEA, and EDGAR Database: Provide access to a wide range of economic data and company regulatory filings.

Getting Started with Stock Analysis

Analyzing US stocks might seem daunting. However, with the right tools and knowledge, you can make smart investment choices. First, understand the types of analysis and key factors. Then, use effective tools. This approach builds a strong foundation for stock evaluation.

Look at a company’s finances, market position, management, and public perception. This helps create strategies for both immediate and future growth.

Starting is simpler than you think. 

With Vested (see Figure 4), you get easy access to financial data, key ratios, and earnings call transcripts, all in one spot. Just log in, enter the stock ticker, and find what you need.

Figure 4: Stock details dashboard by Vested

By leveraging Vested’s resources, you can simplify stock analysis and build a diversified portfolio that fits your strategy.

Log in to Vested today, enter your chosen ticker, and start analyzing US stocks confidently!