As a final step, you compare the estimated ‘intrinsic’ value to the price of the firm’s stock and decide whether it is a good investment. Your final goal is to select the best stock/bonds within the industry and include it in your portfolio based on its relationship with all other assets in your portfolio.
Advocates of the top-down, three-step approach believe that both the economy/market and the industry effect have a significant impact on the total returns for individual stocks. All forms of fundamental analysis are useful, but the success depends on how well we are able to estimate future values for relevant economic variables.
The writer is an associate professor in finance & accounting in IIM Shillong