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Research an Industry


Steps I follow when researching an industry:

Step 1: Pinpoint where we are in the economic cycle. I use a top-down approch to stock investing, assuming the economy moves in cycles. If I can make an educated guess about where the economy is, I can generally know which industries/sectors to invest in. To get more info on cyclical investing, check out Jim Cramer's Sane Investing in an Insane World.



Step 2: Figure out which industries are undervalued. This is tricky. To do this, you will first need to look at a chart of the industry and compare it to the S&P, Dow Jones, and Russell 2000 index. If over the past 3-5 years, the stock has underperformed the market significantly, then I would consider it undervalued. To be sure, make sure to look at the PE and PEG ratios, earnings growth, balance sheet, and cash flow of the companies in the industry or sector and compare it to market averages.

It is important to not only think about whether the industry is undervalued, but also its prospects for future success. Think about whether or not the products produced by the industry will be generally in demand. Are there any catalysts that will increase demand for these products in the future?



Step 3: Learn about the undervalued industry or sector, and narrow your focus to a more specific sub-industry that is particularly undervalued. Learn about the landscape of the industry. Try to figure out which companies have a natural competitive advantage by thinking about the strategic positioning. Think about what the companies do and if this makes sense in the current economic landscape. Are the companies' costs going to go up or down? Are there any trends that could affect the companies' income streams?



Step 4: Narrow your focus to 2 or 3 stocks in the selected sub-industry. You will now want to thoroghly screen each of these stocks based on the steps outlined in the research a stock page of this site.