Fundamental Approach workbook: Fundamental-Approach
The following paragraphs detail the seven steps involved (as used in the above excel workbook) to run a fundamental approach to investing in US stocks.
Step 1
Each month (around the 10th business day), I go to Vanguard's “Custom Reports” tool to download to excel the following data for 10 US Sector ETFs:
Earnings growth rate (G)
Return on equity (ROE)
Price/earnings (PE)
Step 2
To utilize the factors I need, I then develop two numbers for each sector:
PE/G (PEG) : Price/earnings (P/E) divided by Earnings growth rate (G)
Earnings Yield (EY) : Invert Price/earnings (P/E)
Step 3
Then in excel, rank each sector among all 10 sectors across three factors:
PEG
ROE
EY
Step 4
For the growth sectors (consumer discretionary, healthcare, info. tech.), then use the PEG ranks to develop:
“GROWTH SUM” of the growth sectors ranks
“GROWTH AVERAGE” of the growth sectors ranks
For each growth sector: “WEIGHT as a % of the GROWTH SUM”
For the core sectors (consumer staples, industrials, materials, telecomm) use the PEG, ROE, and EY ranks to develop:
“CORE SUM” of the core sectors ranks
“CORE AVERAGE” of the core sectors ranks
For each core sector: “WEIGHT as a % of the CORE SUM”
For the value sectors (energy, financials, utilities), use the ROE and EY ranks to develop:
“VALUE SUM” of the value sectors ranks
“VALUE AVERAGE” of the value sectors ranks
For each value sector: “WEIGHT as a % of the VALUE SUM”
Step 5
For each style (growth, core, value), develop a % of total style averages:
“Growth as a % of Total Averages”: GROWTH AVERAGE divided by the sum of the GROWTH AVERAGE, CORE AVERAGE, VALUE AVERAGE
“Core as a % of Total Averages”: CORE AVERAGE divided by the sum of the GROWTH AVERAGE, CORE AVERAGE, VALUE AVERAGE
“Value as a % of Total Averages”: VALUE AVERAGE divided by the sum of the GROWTH AVERAGE, CORE AVERAGE, VALUE AVERAGE
