The Industry Analysis

 

Now that you know the company is safe to invest in, a check on the industry it operates in is necessary. Start by answering the questions listed below.

ü  Which sector is the company present in? Do you understand the sector and how it works? Is it a scalable segment or a niche segment?

ü  Does it require High Working Capital?

ü  Is it easy for New Companies to enter this kind of a business?

ü  Are the other companies in the same sector growing or not as compared to the company you are planning to invest in in the last 5-10 years? Find reasons if you find a contradictory answer.

ü  Is there a threat of Substitute Products?

ü  Is it a market leader in the industry? If not, why choose this company and not the market leader?

ü  Is it a capital intensive or labour intensive industry?

ü  Is it a pollution generative sector? Carbon Footprint is increasing or decreasing?

ü  Is it a commodity based sector? Is it affected by the weather?

ü  Is the sector currently in Headwinds/Tailwinds?

ü  Is the sector Government Regulated? Is it involved in imports/exports? (If yes, the government will be regulating policies which needs to be checked time and again)

ü  Is it a sector where technology is continuously changing? If yes, how frequently? (This means that they would need to keep changing also continuously which would require high amount of Capex)

ü  Are there any other specific industry-based risk factors which are not mentioned above?

ü  Is the industry favoured by market and giving a high P/E multiple? 

It is always better to list down all the risk factors that might affect an industry/sector which will help you keep track of the macros of the specific industry.

Once you are convinced that this is a good stock to invest in, go ahead and plan your buying. But still you need to make a few decisions before you final put in a Buy Trade. Wait for my post on The Buying/Selling Decision.