Quality and Fundamentals (Part 1)

My recent stock study on EOG garnered some feedback. In particular, I was told EOG has poor fundamentals and future studies on weak companies should require additional investment rationale. For me, this begs the question whether quality and/or fundamentals are important for stock analysis and what the difference may be between them.

I almost want to splash water on my face or pinch myself to make sure I’m actually writing about this. While a new topic for the blog, it is quite relevant to stock analysis: something I have now done over 450 times.

I will begin by including my rebuttal to the critic:

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     > The most important thing I’m looking for when deciding whether to do an SSG
     > is “up, straight, and parallel.” Some need data excluded in order to rise to this
     > level. Especially because many [stocks] can’t be cleaned no matter what, I
     > think the [visual inspection] filter does a pretty good job…
     >
     > Before even looking at my [EOG study done six weeks earlier], I asked Google
     > AI “why does EOG have such poor fundamentals?” I phrased the question to
     > assume the worst because I find the AI tool to have some built-in confirmation
     > bias. Here is the response:
     >
     > https://share.google/aimode/oQuiE6JHpLI4Vc7qp
     >
     > In fact, [despite bias to the contrary] Google AI says EOG has “solid
     > operational fundamentals!”
     >
     > In looking closer at my [study], I do detail the process (i.e. “offer rationale”).
     > It’s certainly not uncommon that we exclude early years of historical data
     > (’15-’16 have negative EPS, which I explain). It’s also not uncommon to
     > exclude a COVID-19 year as I explain.
     >
     > My fourth paragraph addresses management metrics; I’d say leading industry
     > averages in all three [PTPM, ROD, and debt-to-capital] is pretty good.
     > Furthermore, VL gives an A grade for Financial Strength, Interest Coverage
     > is 35, and M* rates the company “Exemplary” for Capital Allocation.
     >
     > Not only do I think EOG has decent fundamentals, I also think I did ample
     > job to explain why the data exclusion might be questionable. I actually do
     > this consistently with comments like “consider XYZ only for a speculative
     > position rather than a full core holding…”
     >
     > I have always believed one of the more interesting and advantageous facets
     > to public sharing of SSGs is how relaxed the criteria are. That allows
     > for participation by beginners in addition to veterans who may be interested
     > to study an occasional stock for educational purposes only. Stock studies
     > offer much to learn for analysts and the audience.

I will continue in a future post.

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