Why Tracking Stock Fundamentals Matters to Hedge Funds

Hedge funds are private investment vehicles that use aggressive and often unconventional strategies to chase high returns. They typically require investors to meet high income or net worth thresholds, making them accessible only to accredited individuals.

Unlike mutual or pension funds, hedge funds have fewer regulations and greater flexibility in using tools like leverage, short selling, and derivatives. This freedom comes with increased risk, but it also opens the door for large gains, especially for those willing to bet big on market trends or economic events.

Hedge funds tend to favor stocks with high growth potential and strong market momentum, which could lead to outsized returns

Hedge funds do deep research, have access to insider networks, and can spot trends early. That’s why tracking stock fundamentals gives retail investors insight into what Wall Street’s smartest money is betting on.

Why Retail Investors Follow Hedge Fund Stock Pics

Hedge funds look for companies with strong revenue growth, solid profit margins, high returns on equity, and reliable cash flow. They also favor businesses with competitive advantages, quality leadership, and stocks that appear undervalued based on key stock fundamentals.

They tend to favor companies with:

• Strong revenue growth
• Solid profit margins
• High return on equity (ROE)
• Reliable cash flow
• Competitive advantages and great leadership

They also love undervalued stocks that still check all the right boxes.

The above Data Panel neatly displays many of the stock fundamentals that top hedge funds track.

What are Quarterly and Annual Earnings

Quarterly Earnings refer to a company’s net income over a quarter-over-quarter period, also known as a fiscal quarter. This figure represents the total revenue minus expenses, taxes, and other costs for that quarter.

A company’s ability to consistently generate positive earnings is often seen as a sign of financial stability and growth potential, making Quarterly earnings a critical measure of profitability.

Annual Earnings cover the entire fiscal year, summarizing all four quarters. It’s a more holistic view of the business’s performance throughout the year.

Both are essential pieces of the stock fundamentals puzzle. A consistent track record of earnings growth is a signal of financial strength and long-term potential

Why do Earnings Move Stock Prices?

Stocks often surge or crash after earnings reports. Why? Because markets are expectation-based.

If a company beats expectations, the stock usually goes up. If it misses, the price might drop.

Investors track quarter-over-quarter and year-over-year growth in earnings. Rising profit signals business expansion, while declines might show signs of deceleration.

How do Quarterly and Annual Sales Impact Profit Potential?

Quarterly Sales represent the total revenue generated from the sales of goods and services during a fiscal quarter. It’s a gross figure, meaning it’s calculated before any deductions like expenses or taxes.

Strong sales growth shows increasing market demand and positive sales trends. But if sales start declining, it can be a warning sign of internal issues or market challenges that need attention.

Annual Sales include the entire fiscal year, totaling all four quarters. It’s a larger view of the business’s profits throughout the year.

Strong sales growth often signals rising market demand and can validate a company’s business model, making it a cornerstone of solid stock fundamentals. Hedge funds love to see this kind of growth, especially in early-stage companies.

Why Sales Growth Matters for Investors?

You can’t grow profits without growing sales. If a company’s top line (revenue) isn’t rising, it’s hard to believe the bottom line (profit) will for long.

Big increases in quarterly or annual sales suggest customers want the product. It’s a strong validation of the business model – especially for early-stage growth stocks.

When a company consistently grows faster than its industry peers, it’s likely gaining market share, which can lead to long-term dominance and higher stock valuations.

What are Quarterly and Annual Net Profit Margins?

Net profit margin shows how much profit a company makes for every dollar of revenue, after all expenses (like taxes, operating costs, and interest) are paid.

Example: If a company made $10 million in revenue and $2 million in net income in Q1, its net profit margin is 20%.

Quarterly Net Profit Margins are a measure of the company’s profitability over 3 months. This is important for tracking short-term trends and quarterly earnings performance.

Annual Net Profit Margins are based on 12 months of performance. Monitoring yearly profit margins helps assess long-term profitability and business efficiency throughout seasonal fluctuations or one-off events.

Quarterly and annual net margins help track short-term performance and long-term trends, making them a vital part of assessing stock fundamentals. Companies with rising margins often show strong operational execution and cost control.

Why Profit Margins Tell the Real Story?

Net profit margin tells you how much a company keeps after all expenses, including taxes, interest, and operating costs. They’re especially valuable when comparing stock fundamentals across industries.

• Higher margin = more efficient and potentially more resilient.
• Lower margin = less cushion during economic downturns or cost spikes.

Industries like software or pharma often have high profit margins due to pricing power or low costs. Industries like retail or airlines have thin margins, where even small changes can impact profits heavily.

How Quarterly and Annual After-Tax Profit Margins are the True Bottom Line

After-tax profit margin is the percentage of net income left after all expenses, including taxes, are deducted from revenue. It tells you what’s actually left for shareholders after everything else is paid.

It’s often used interchangeably with net profit margin, but some investors make a specific distinction when analyzing how taxes affect profitability.

Quarterly After-Tax Margins are calculated using the company’s financial performance over a 3-month period. This short-term analysisis is useful for spotting sudden profitability changes, like a big tax hit, margin improvement, or cost shift.

Annual After-Tax Margins reflect full-year profitability after all taxes, smoothing out short-term volatility. This is crucial for long-term trend analysis and institutional evaluations.

Why After-Tax Profit Margins Matter Most?

This is the bottom line – what the company actually earns from every dollar of sales. Unlike gross or operating margin, after-tax margin includes everything, making it the most comprehensive profit measure.

Companies with high after-tax margins tend to have pricing power, brand strength, or cost advantages that keep them ahead of competitors.

Higher margins indicate:

• Efficient cost control
• Favorable tax strategies
• Strong business model

Companies with rising after-tax margins often see growing investor confidence.

What Return On Equity and Return On Assets Really Mean

Return On Equity (ROE) measures how effectively a company uses shareholder equity to generate profit.

Example: If a company earns $10 million and has $100 million in equity, its ROE is 10%.

ROE shows how well the company turns investment into profit. A high ROE means strong management performance and financial efficiency.

Return On Assets (ROA) shows how efficiently a company uses all of its assets to produce profit.

Example: If a company makes $10 million in profit on $200 million in assets, its ROA is 5%.

ROA reveals how well the company uses resources like factories, equipment, and cash.

Both are core indicators in evaluating stock fundamentals. High ROE and ROA suggest smart management, efficient operations, and a scalable business model

Why do Quarterly and Annual Return on Equity and Return on Assets Matter?

Both ROE and ROA tell you how effectively a company turns money (capital or assets) into profit.

• ROE is most useful for shareholder return potential
• ROA is better for asset-heavy businesses (banks, manufacturers, energy)

High ROE/ROA means the business can grow without needing massive capital. Consistently high ROE/ROA shows strong leadership that knows how to allocate capital wisely.

Poor returns? Usually a sign of bloated spending or weak margins. A super-high ROE with very low ROA might mean the company is over-leveraged (taking on lots of debt).

How Top Hedge Funds Screen for Stock Fundamentals

Top hedge funds demand highly liquid stocks. Moving billions worth of assets requires buying large stocks with high dollar volume.

The Deepvue Liquid Leaders Screener Preset includes Absolute Strength Ratings in addition to a high dollar volume to make sure you are focused on the top-performing stocks that are liquid enough for large institutions.

The 20/20 Screen: Jim Roppel’s Formula for Elite Stock Fundamentals

Jim Roppel is a successful hedge fund manager and a devoted follower of the CANSLIM methodology. Over the years, Roppel has refined his investing strategy to focus on finding high-quality growth stocks with strong fundamentals and leadership characteristics.

Jim Roppel’s “20/20” approach is designed to identify stocks with the greatest potential for significant price gains.

• 20% Sales Growth
• 20% Earnings Growth
• 20% Quarterly ROE
• 20% Profit Margins

Narrow down your search with this screener preset to focus on the best institutional quality stocks.

Key Takeaways on Stock Fundamentals

Watch for earnings beats and upward revisions – these attract institutional buying.

Compare YoY and QoQ growth: Is revenue accelerating or slowing down?

Look for earnings and sales to be greater than 20%: This is a CAN SLIM benchmark.

Watch profit margin trends: Are margins expanding or shrinking? Margin expansion + sales growth = super bullish combo.

A stock can have massive sales growth, but if after-tax profit margins are falling, it might be spending too much to grow, or getting squeezed by rising costs.

ROE and ROA help you understand how well a company turns capital and assets into profit.