How can fundamental analysis help in picking two stocks for long-term investment?

Solving the Stock Picking Headache

Let’s be real: picking stocks for the long haul can feel like trying to find a needle in a haystack, especially if you want to avoid meme stocks and one-hit wonders. The good news? Fundamental analysis is like giving yourself a metal detector. Instead of chasing hype, you’re digging into the numbers, the strategy, the health of the business. It’s a bit like financial detective work—less about guesswork, more about connecting the dots. A few years ago, I set out to build a long-term portfolio. I’d been burned by chasing “hot tips” before, so this time I wanted cold, hard data. But the first time I tried, I got overwhelmed: there’s income statements, cash flow, PE ratios, growth rates, debt, margins—you name it. I needed a process that made sense, that I could actually repeat. What follows is the distilled version of that journey, with screenshots, data, and even a regulatory rabbit hole or two.

Step 1: Scanning for Earnings Power

First up: earnings. Why? Because over the long run, it’s earnings that drive stock price appreciation. Warren Buffett puts it simply: “If a business does well, the stock eventually follows.” So I started with a screener—Yahoo Finance is fine, but I love using Finviz for quick filtering. Here’s what I looked for: - Trailing twelve months (TTM) net income growth - Five-year average earnings growth I thought I nailed it by picking two companies with recent earnings jumps. Turns out, one was a cyclical business bouncing off a bad year—totally misleading! So I learned to always check the longer-term earnings trend. Here’s what a good example looks like: Above: Filtering for companies with consistent 5-year EPS growth above 10%. The key? Not just one or two good quarters, but a steady multi-year climb. Think about how Apple’s earnings stack up versus, say, a commodity producer that’s all over the place.

Step 2: Gauging Growth Potential (Beyond the Hype)

Growth is the next leg. But not all growth is created equal. I used to chase top-line (revenue) growth, but after a few flops, I realized you need to look at margins and the underlying business model too. Here’s what I do now: 1. Check revenue and earnings growth side-by-side—if revenue’s up but earnings are flat, costs might be exploding. 2. Read the latest 10-K or annual report (yeah, it’s boring, but the Management’s Discussion & Analysis section is gold). 3. Compare analyst projections using FactSet or Morningstar. For example, when I was looking at two candidates—let’s call them Stock A (a cloud software company) and Stock B (a consumer goods giant)—I noticed that Stock A had 30% revenue growth but barely any profit. Stock B, meanwhile, was growing slower but throwing off tons of free cash flow. I called up an old friend who now works in equity research. He said, “Don’t assume growth always wins. If it’s not profitable, it’s not sustainable.” Looking up the numbers, I saw Stock B’s return on equity (ROE) was above 18%—a great sign per Investopedia.

Quick Diversion on Growth vs. Value

Here’s where I nearly tripped up: I almost ignored Stock B because it felt “boring.” But boring can be beautiful if the fundamentals are strong. I checked the Price/Earnings to Growth (PEG) ratio—Stock A was at 3.5 (overvalued), Stock B was at 1.2 (underappreciated). This was a lightbulb moment for me.

Step 3: Dissecting the Balance Sheet

Here’s where the real detective work happens. I once picked a company with amazing revenue growth, only to miss that it was drowning in debt. Six months later, dilution hit and the stock tanked. These days, I focus on: - Debt/equity ratio (lower is better for stability) - Current ratio (can the company pay its short-term bills?) - Cash flow statement—especially free cash flow Let’s look at a real-world example: Microsoft (MSFT). According to its latest 10-K filing, its debt/equity ratio is below 1, with tens of billions in free cash flow. That’s financial flexibility you want in a long-term pick. Compare that to a company like Bed Bath & Beyond (pre-bankruptcy), with a high debt load and negative cash flow. The difference is night and day.

Case Study: Picking Two Stocks Using This Process

Let’s put it all together with a simulated example (based on real data): Stock X: Johnson & Johnson (JNJ) - Five-year EPS growth: 8% - ROE: 24% - Debt/equity: 0.45 - Free cash flow: consistently positive - PEG: 1.4 Stock Y: Adobe (ADBE) - Five-year EPS growth: 19% - ROE: 36% - Debt/equity: 0.68 - Free cash flow: strong and growing - PEG: 1.6 Both businesses are leaders in their field, resilient, and well-managed. I simulated a $5,000 buy-and-hold for each. Over five years, both handily beat the S&P 500 average. The kicker? Both came through market corrections with less volatility than “hotter” picks. Sometimes, it comes down to what you’re comfortable holding through a crisis. For me, both these stocks checked the boxes on earnings, sustainable growth, and a fortress-like balance sheet.

Compliance and International Standards Rabbit Hole

I got curious about how different countries verify the legitimacy of financials (“verified trade” standards). Turns out, there are real regulatory differences:

Country/Region	Standard Name	Legal Basis	Enforcement Agency
USA	SEC Financial Reporting	Securities Exchange Act of 1934	U.S. Securities and Exchange Commission
EU	IFRS Standards	EU Regulation (EC) No 1606/2002	European Securities and Markets Authority
China	Chinese GAAP	Accounting Law of the PRC	China Securities Regulatory Commission

As per OECD Principles of Corporate Governance, the robustness of disclosure and verification standards impacts investor trust. So when you see a US-listed company audited under SEC rules, that’s a higher baseline than certain emerging markets.

Expert Voice & Messy Reality

I once attended a webinar hosted by CFA Society New York. One analyst put it bluntly: “No process is bulletproof. But if you make a habit of ignoring the balance sheet or overpaying for growth, you’re stacking the odds against yourself.” Here’s a messy real-world clash: When Alibaba listed in New York, US investors got financials audited per US GAAP. But Chinese regulators didn’t always recognize those same audits, leading to headaches for cross-border investors. The USTR’s 2021 WTO Compliance Report even highlights these regulatory frictions.

Personal Reflection and Next Steps

Looking back, I’ve had my share of mistakes—ignoring debt, chasing “growth” without profits, or getting blinded by sector fads. But the more I stuck to a process—earnings, growth, balance sheet, and a sanity check on valuation—the more my winners outpaced my losers. If you’re looking to pick two stocks to buy and hold, start with the fundamentals. Don’t just trust what’s trending on social media. Dive into the filings, run the numbers, and use international compliance standards as a filter for trustworthiness. Next steps? Build a watchlist, get comfortable reading annual reports, and don’t rush the process. And if you screw up—congratulations, you’re an investor now. Learn, adapt, and keep your focus on the long game.