Security Analysis: Part 2 Industry Analysis

The security analyst who knows economics intimately is well started on the path to effective and useful security analysis. The second step is to do a careful industry analysis. Individual stock prices are tied to the health of the industry sector it belongs to. It makes sense to examine the demands within an industry which put pressure on individual firms in order to identify the companies that show healthy promise. Stability and growth can be predicted to some extent by understanding several key issues: 

1. The Essential Characteristics of the Industry: Is this industry narrowly defined or does it cover a wide area? Are there many competing companies or just a few? 

2. The Regulatory Arena for the Target Industry: Is this industry regulated? (Utilities, for instance). 

3. The Impact 0f Labor on the Industry: Does the industry rely on labor that has contentious relations with employers or does it have trouble recruiting qualified employees? 

4. Technological Influences on the Industry: In order to keep robust does this industry depend on new developments in technology or is the technology that drives the industry stable? 

5. Economic Variables that Impact the Industry: Is the demand for the industry’s output likely to remain stable or is it tied to economic ups and downs? 

6. Supply, Demand and the Future: Does this industry compete with other industries for resources? (For instance does your targeted industry use massive amounts of water and compete with agribusiness, fish and wildlife concerns, or major cities for available water?)

Remember that the purpose of security analysis is to identify value. The search for value within the key industry groups (industry analysis) demands an intimate understanding of industry sector trends. Become familiar with industry analysis by reading business publications, studying investor sites, and following the performances of industrial sectors. Here are two places to get started: