<FOOLISH FOUR PORTFOLIO>

Analyze This!
Fundamental Analysis for Beginners

by Chris Rugaber (TMF [email protected])

Alexandria, VA (March 25) -- This week it looks like our Foolish Four portfolio is down a bit, roughly 2% lower than last Thursday. No big deal, certainly, given that as of yesterday's close we were still 2 points above the Standard & Poor's 500 Index. Nevertheless, for those keeping score at home, it's primarily 3M's fault.

Minnesota Mining & Manufacturing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> issued a mild earnings warning last Wednesday, indicating that due to a recent increase in the dollar's value, which reduces the value of the company's international sales, first quarter earnings may be $0.03 per share lower than the consensus estimate of $0.93. The company states that "from an operational standpoint, nothing has changed," so ideally this will be temporary. 3M is still aiming to boost profit by 8% this year, but some analysts are skeptical that its current restructuring is extensive enough to compensate for the dollar's strength and other problems, such as Brazil's economic troubles. As of yesterday's close, 3M's stock was down a little over $5, about 7%, from last Wednesday's close.

This is something investors can follow for themselves by looking at the company's margins and operating expenses, which we began to do two weeks ago with Caterpillar. Our Foolish Four holdings are the result of a mechanical screen, but since we'll be keeping them for a year and a day, we might as well learn about them and learn from them. Investors who want to forget about them until the next switch are free to do so, but for those who may want to begin evaluating individual stocks and making investments outside the Foolish Four, our Dow stocks can serve as excellent examples.

Two weeks ago, we looked at Caterpillar's income statement and saw how the company's profits were declining even as its sales revenue increased, primarily as a result of its falling margins. We also saw a significant increase during 1998 in R&D and sales, general, and administrative expenses (SG&A), and we also saw how Caterpillar's share buyback program helped keep the decline in earnings per share (EPS) lower than the company's overall profit decline.

However, we may have gotten ahead of ourselves. Let's take a broader look at fundamental analysis and some of the tools an investor can use.

Fundamental analysis simply involves looking at the dynamics of an individual business -- its products, finances, and industry, for example -- and deciding whether to buy its stock based on those dynamics. It's a very broad term, of course, and can encompass virtually anything that isn't technical analysis or mechanical screens. Technical analysis, by the way, involves looking at lots of stock price charts and trying to figure out where a stock is going based on trends in those charts. It's kind of esoteric, and Fools don't really waste any time with it.

Anyway, when researching a company, its SEC filings and annual reports should be among the first places to go (after the Fool's data offerings, of course). All publicly traded companies in the United States are required to file three quarterly reports, or 10-Qs, and an annual report, or 10-K. Each of these reports is required to include three financial statements: the income statement, the balance sheet, and the statement of cash flow. Some narrative discussion of the current and future state of the business, usually titled something like "Management's Discussion and Analysis of Results," is also required.

Most companies also produce annual reports for shareholders, which are usually more glossy and colorful than the SEC reports, of course. You can access most companies' annual reports on their websites. They might include some interesting details about the company's business, but the financial statements are usually not as detailed as the ones in the 10-Qs and 10-Ks.

Nevertheless, skimming an annual report can help an investor gain a fuller understanding of a particular company. Returning to the Foolish Four stock we've been looking at recently, Caterpillar's annual report is useful for just that purpose. We all know, presumably, that the company builds big machines -- tractors, front-end loaders, dump trucks, and all that stuff that we thought was really cool when we were kids (well, at least if we were boys).

Yet there is more to Caterpillar than that, and even its machine business has seen some interesting developments recently. We'll look into that more next week. Until then, Fool on!

Today's Stock Lists | 1998 Dow Returns

03/25/99 Close
Stock  Change   Last
--------------------
CAT  +1  1/2   47.44
JPM  -   5/16  122.13
MMM  -   7/16  70.88
IP   +  11/16  45.31




                   Day   Month    Year   History
        FOOL-4   +1.00%   4.13%   5.19%   6.75%
        DJIA     +1.75%   5.69%   7.52%   7.09%
        S&P 500  +1.69%   4.17%   5.26%   5.52%
        NASDAQ   +2.94%   6.42%  11.04%  12.57%

    Rec'd   #  Security     In At       Now    Change

 12/24/98    9 JP Morgan    105.51    122.13    15.75%
 12/24/98   24 Caterpillar   43.08     47.44    10.11%
 12/24/98   22 Int'l Paper   43.55     45.31     4.05%
 12/24/98   14 3M            73.57     70.88    -3.66%


    Rec'd   #  Security     In At     Value    Change

 12/24/98    9 JP Morgan    949.62   1099.13   $149.51
 12/24/98   24 Caterpillar 1034.00   1138.50   $104.50
 12/24/98   22 Int'l Paper  958.12    996.88    $38.76
 12/24/98   14 3M          1030.00    992.25   -$37.75

              Dividends Received      $15.04
                             Cash     $28.26
                            TOTAL   $4270.05

</FOOLISH FOUR PORTFOLIO>