In a previous article we described how to pick stocks based on a relative value approach within an industry. In this article we describe methods to screen for industries as opposed to the stocks within them. Many market practitioners stress the importance of industry analysis and maintain that however good the quality of a stock is, it is highly unlikely to outperform if the industry is performing poorly. Many of the ideas in this section have been taken from TV presenter and market practitioner, Jim Cramer.
What is Industry Stock Analysis?
Industry analysis is the analysis made in a specific sector or industry. This compares to stock analysis which is the research provided on a particular company and stock, or macroeconomic analysis which analyzes the fundamentals of a specific country. Industry analysis investigates the general fundamentals of the equities within the industry but more importantly investigates the state of external factors and how they should affect the particular industry or sub sector. Different macroeconomic data and other statistics have a particular bearing on certain industries and analysts gauge to see how these data will affect them. Furthermore industry analysts also investigate the level of demand such as consumer tastes and supply such as competition within the industry and how stock prices should get affected by them.
Why the need for Industry Analysis?
Many analysts suggest that resisting the business cycle is futile. For the simple reason that most prices are governed by large financial institutions that buy and sell the majority of the volume of stocks and these institutions generally give a very heavy weighting to the performance or the expected performance of a specific industry. After market risk, this is the most influential factor in the performance of a stock.
To summarize there are two reasons why industry analysis is important. 1. Generally the performance of a company is a function of the performance of the industry. For example if raw material in a particular industry has gone up then all the companies in the industry will get affected. 2. Psychological reasons. If an industry suddenly gets in vogue or if a sudden change in the news is perceived to be good or bad for an industry the price of the stock will be affected mainly from what the average investor believes and most investors will follow industry trends.
How are Industries Broken Down?
Industries are broken down by groups and subgroups.
The first financial ratio of the analysis is the Price to Earnings ratio (“P/E ratio”). The ratio is computed by dividing the price of one share of common stock, by the earnings per share of common stock. This analysis uses diluted earnings per share which assumes the issuance of new stock for all existing stock options. Also, the price of the stock was computed as an average of the fourth quarter high and low stock prices published in the 10K report of each company, because the year end stock prices were not listed for all the companies. Because the P/E ratio measures the relative costliness of different stocks, in relation to their income, it provides a useful place to begin the analysis.
Spokane Industries has contracted Franklin Electronics for an 18 month product development contract. Franklin Electronics is new to using project management methodologies and has not been exposed to earned value management methodologies. Even though Franklin and Spokane have worked together in the past, they have mainly used fixed-price contracts with little to no stipulations. For this project, Spokane Industries is requiring Franklin Electronics to use formalized project management methodologies, earned value cost schedules, and schedules for reports and meetings. Since Franklin Electronics had no experience with earned value management, the cost accounting group was trained in the methodology in order to bid for the project.
What is the difference between a.. Makes inter-firm comparison possible Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding whether their efficiency or otherwise in the past and likely performance in the future. 5. What is the difference between a'smart' and a'smart'? Help in investment decisions It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.
The defense of our nation and its allies across the globe is essential to the success of the world we live in. The methods in which this defense takes place varies in many different ways, in air, on land, and at sea. Within our nation lies some of the largest defense organizations on the face of the planet, most, if not all, of which strive to protect the United States of America in all arenas. One of these organizations is Northrop Grumman. Northrop Grumman is one of the largest global aerospace and defense technology companies in the world. The company employs over 68,000 employees worldwide, and was named as the fourth-largest defense contractor in the world in 2016 (Forbes, 2016). It grossed over $23.526 billion in 2015. Northrop Grumman
Bujaki, M., & Durocher, S. (2012). Industry identification through ratio analysis. Accounting Perspectives, 11(4), 315-322. http://dx.doi.org/10.1111/1911-3838.12003
For many years, IBM succeeded in holding a very good market position. In fact, the company achieved a very high market share and huge profits. However, this situation did not last forever. In 1990, IBM experienced its first quarterly loss of $2billion due to some unexpected accounting charges. However, revenues increased from $62.7 billion in the previous year to $96 billion. In 1991, the c...
The automotive industry is one of the most important sectors of the economy for every country in the world. It involves a large number of corporations and institutions engaged in the manufacturing process of motor vehicles including designing, developing, manufacturing, marketing, and selling. It contributes to the global economic growth by generating a significant return and creating a ripple effect on supporting the supply chain as well as providing job opportunities for the skilled workers (ACEA, 2016).
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
In 1944, Kia Motors Corporation of Seoul, Korea, was founded as a manufacturer of steel and bicycle parts (Kia.com). During the early1950’s, the company changed its name officially to Kia Industries and began production of Korea’s first bicycle (Kia.com). In 1957 Kia began producing Korean’s first motor scooter, the C-100 (Kia.com). Korea’s first truck, the K-130 was introduced in 1962 (Kia.com). In 1971, the Titan, a 4-wheel cargo truck was produced (Kia.com).
We analyzed the market for two weeks to determine when the equity market would turn from a bearish to bullish market. Without a change in the market and a declining bond price, we decided to invest in equities according to our investment strategy, which brought us into the second phase of our portfolio. Therefore, at the beginning of February we bought shares in Sirius, Microsoft, Neon, Washington Mutual, and Nike. As assumed, the equity market continued to plummet decreasing the value of all our stocks except for our Gold Corporation stock.
Leonard Prescott, vice president and general manager of Weaver-Yamazaki Pharmaceutical of Japan, believed that John Higgins, his executive assistant, was losing effectiveness in representing the U.S. parent company because of an extraordinary identification with the Japanese culture.
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
Choosing two profitable stocks amongst a myriad of potential alternatives is a daunting task to say the least. In order to narrow my choices from thousands to two, I examined several aspects of companies I was interested in. Among these were, company overview, alpha and beta ratings, price ratios, price charts, and company headlines. After evaluating this information, I chose Intuit INC (INTU) listed on the NASDAQ and Johnson and Johnson (JNJ) listed on the NYSE.
In the modern world, financial markets play a significant role, with huge volumes of everyday dealings. They form part of contemporary economic lifestyle and determine the level of success of many people. Humans have always been uncertain of what the future holds and thus, tried to forecast it. The forecast of course cannot omit the likelihood of “easy money” by forecasting the prices of equity markets in the future.
Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions.