Besides fundamental analysis there are several factors to consider before investing in any stock for a long time horizon. There are several factors to consider like business model, company’s staff and management, competitive advantage, entry barrier etc. These factors are intangible in nature and fundamental analysis fails to analyse them. In this column we will make a discussion about Stock Picking Strategies i.e., Qualitative Analysis of Stocks which is able to describe the above mentioned points such as business model, company’s staff and management, competitive advantage, entry barrier etc.
Business Model
Ace investor Warren Buffet once suggested that an individual investor should invest in such companies or stocks whose business model or modus operandi is clear like a day to the investors. It is very important to understand what the business of the company is like. In other words, what the company sells or what services it offers and how the company makes profit from its operations is to be considered.
Investors should also see whether the demand of the product the company sells will remain constant or moving upward in future. For example, food products, steel, electronic tools are inevitable for everyday life. So, the demand of these things will remain constant or increase in the future. The companies operating in these sectors will make profit.
Stock Picking Strategies Infographic
Again, how a company operates its business influences its profit margin. It is also a part of the business model of a company to distribute the profit among its share holders. How a company produces its products, how it sells them, how the packaging of the products are attractive, company’s marketing policies all these things form a business model.
In addition to
The source of capital or fund to run or expand the business is also very crucial. An under debt company cannot afford to distribute the dividends among its shares holders, because a lion share of the profit goes to repay the debt. On the other hand, a company which is a zero debt company can yield better dividend and better return in the future. So, the above mentioned points are treated as the business model of a company. By reviewing the business model you can get a clear idea whether the business model is unrealistic or there is any chance that the business will succeed.
Management is the back bone of the company. A quality management will raise a company to the pick. It is a proven fact that a good management in competitive industry will yield better returns than the worst management in monopoly market. In order to access the strength of a management, you need to consider the following aspects.
The persons who manage the company’s business and the persons in key positions i.e., CEO, CFO, COO & CIO.
You need to examine the educational and employment backgrounds and previous employment records of the personnel. Suppose, the CEO previously worked in coal sector and then he has shifted to technology. There are minimum chances that he will succeed. Ask yourself whether he is able to deliver success to the company.
You should analyse the management’s style how the team manages the business, whether they promote the business as an open, transparent and flexible way.
You need to analyse when the management has taken charge. Suppose, the management has been unchanged during past 10 years. Then this long tenure of the management is a good indication. It means the management is quite successful and has delivered the desired financial results such as compounded sales growth, compounded profit growth, a good return on equity. If you see a company is changing a management team frequently then you need to invest your money to somewhere else.
Again, if you watch only restructuring of business or management then you need to analyse carefully. The restructuring is not always bad. There are several businesses which have turned around. You need to watch out the new management team’s members, their past achievements. When company hires management it chooses wisely who can do well for the company’s current financials.
Competitive advantage
A competitive advantage allows a company to produce quality service and better price for its customers. Then this competitive advantage accelerates the company’s sales margin which increases profit margin than its competitors i.e., pear companies. While you invest your money in any company you should choose such a company that has sustainable competitive advantage in respect of cost structure, brand reorganization, corporate reorganization, product quality distribution network and superior customary support. The brand value or name of any company is in the billions of money. A portfolio of brand influences the sales and growth of the company in many ways. It is a competitive advantage than its peer companies.
Let’s understand this with an example. Whenever we talk or think about adhesive the first name comes to our mind is Fevicol, Fevistick, Fevikwik, m-seal, Dr. Fixit etc. All these are brands of Pidilite industries. The products of Pidilite Industries possess a superior quality. The company maintains vast distribution network and superior customer service to establish this company as a market leader in the adhesive Sector or Industry.
Whenever we talk or think about Trolly or casual Bags the first name comes to our mind is Aristocrat, Skybags etc. All these are brands of VIP industries. So, you need to consider these factors before making investment in a company.
After selecting the company you need to analyse the industry or sectors in which the specific company is in operation i.e., the growth potential of the industry. A mediocre company in a growth industry can generate better return on equity than a good company in a dying industry. You have to watch out which industry is growing and likely to deliver better Return on equity.
Whether the industry or company creates entry barrier
Suppose, you want to open a restaurant then you can easily open a restaurant as it does not require the best skill level and large capital. But if you want to set up a company in adhesive industry or automobile industry or pharmaceutical industry you will face a great entry barrier created by these industries. These industries however have created massive barrier to make entry like large capital expenditure, exclusive distribution network, government regulations, patents, brands reorganizations and still counting. The harder the entry barrier is better the advantage for the existing companies are.
The bottom line is that you should analyse the news coming to you from various sources. Because of JIO, internet connection has become easily available. JIO has increased the use of Smartphone. So the sale of Smartphone as well as the number of internet users have rapidly increased and till counting. This has increased the demand of optical fiber as optical fiber is requited to spread the internet connection to every nook and corner of the country. So, companies operating in this field are direct beneficiaries and by investing in this sector you will get better returns. As a fundamental analyst you need to analyse both the fundamental as well as the qualitative analysis of stocks so that you can choose your desired investment opportunity. The qualitative analysis of stocks will help you to choose the best company among the companies operating in any industry and yield better returns.
Do you have any questions about Qualitative Analysis of Stocks? Please leave a comment and we can have a discussion. If you like the post then share with your loved ones.
Thanks for your opinion on stock picking strategies. #HappyInvesting.