How we choose stocks

How we choose stocks

The following factors are taken into consideration when selecting each individual security:

  • Macroeconomic variables
  • Fundamentals of the issuers
  • Technical analysis

Macroeconomic Analysis

Macroeconomic Analysis

Macroeconomic analysis makes it possible to identify the key variables that influence the economic performance of a country, so as to be able to determine the possible scenarios capable of conditioning the value of financial instruments.

In particular we take into consideration:

  • Gross Domestic Product, or GDP. This indicator provides information on the trend of national production and the economic development of a given country.Unemployment, also a factor that indicates the health and economic stage of a given country.
  • Inflation. By studying the general trend in the prices of goods, it is possible to understand the effects on interest rates and consequently on the prices of financial instruments.
  • Monetary and economic policies. Maneuvers implemented by the Central Bank on the amount of money in circulation and financial maneuvers on taxation and public spending can influence interest rates and returns on financial instruments.
  • Government policies. The latter, through investment and management of public spending, influence the economic and financial structure of a given country, conditioning the performance of a sector and market.
  • Confidence indicators. These indices, such as those developed by ISTAT on consumer and business confidence, provide information on the economic conditions of a country.

All of these aggregate data and indicators make it possible to identify the economic cycles of a country, with their respective phases of expansion and recession, which have a substantial effect on financial markets.

Fundamental Analysis

Fundamental Analysis

Fundamental analysis, i.e. the study of balance sheets, assets and liabilities and earnings of companies, aims to select the strongest companies from an economic point of view:

  • Revenues that have been growing for several years.
  • Constant profitability, above the market average.
  • Expected above-average profit growth in subsequent years.
  • Low debt.
  • Price multiples below industry average.
  • Steady and increasing dividend payments.

In this way we identify the best performing companies in the market from among thousands of companies.

In particular, we look for companies that have sustainable competitive advantage and pricing power through brand loyalty, ownership of intellectual property rights, and production of an innovative product.

Companies that operate in areas of structural growth such as digitalization, artificial intelligence, cybersecurity or cloud computing; companies that are market leaders and will continue to be so in the years to come thanks to a structure and operating model capable of ensuring sustainable and profitable growth over time.

The starting point of fundamental analysis is the concept that the market price of the stock may deviate from the real value in the short term, while in the long term it will reflect the real value of the company in question.

Our aim is to identify the possible deviations, in the short term, between the market price and the real value of the stock. Basically, with fundamental analysis we find undervalued or overvalued securities compared to their theoretical value.

The steps through which we estimate the real value of a company, i.e. the intrinsic value of the stock are as follows:

  • We analyze the main balance sheet indicators, e.g. ROA, ROE, ROI, of the company in question, comparing them with its own historical values and with the values of competing companies operating in the same sector. This step is essential to identify the company’s management and financial parameters in order to identify the determinants of value creation.
  • Forecasting of all items in the Income Statement and Balance Sheet, in order to determine future cash flows to be discounted on the basis of an appropriate cost of capital in the various valuation methods.
  • On the basis of the data provided by the Forecasting, we estimate the intrinsic value of the company using various valuation methods, depending on the intrinsic characteristics of the companies analyzed: Discounted Cash Flow method (DCF), based on discounting future cash flows; Dividend Discount Method (DDM), based on discounting future dividends; and Relative Valuation, based on comparing market multiples.

Technical Analysis

Technical Analysis

Subsequently on the selected shares we use technical analysis to determine the timing of entry and exit, i.e. when to buy and sell.

Technical analysis, through the systematic use of graphs, focuses on price movements in order to predict future trends, assuming that prices follow trends and that history repeats itself or that market movements are recurrent over time.

Trends can be bullish (characterized by increasing highs and lows), bearish (characterized by decreasing highs and lows) or sideways (characterized by horizontal highs and lows).

What we do is:

  • Identify stocks with a bullish trend to ride their uptrend.
  • We buy stocks in a sideways phase when they are on the minimums of that phase, in technical jargon it is called support, in order to take advantage of the next rebound towards the previous maximum
  • We find the points of inversion of the securities in bearish trend, that are good points of entry in order to take advantage of the successive upward trend, individualizing those that are defined figures of inversion of the trend

To identify these situations, in addition to the graphical analysis, we also use technical indicators such as moving averages, supertrend, Macd, Rsi and the Japanese candlestick technique.

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