A company doesn't exist in a vacuum. Its niche, the products it sells, and the competitors it faces all play a part in determining how successful that company is going to be. Choosing the 800-pound gorilla over the 100-pound chimp will help you avoid being an investing chump.
Yet merely being strong doesn't mean you're going to win. First-mover and top-dog status is indeed a clue, and it's something David Gardner looks for in his Rule Breaker selections, but that's not all you need. I like to look at how a company sits within its industry, what that industry is doing, and where that industry is going. Cutting-edge companies within an industry are bound to be the ones breaking the rules and becoming promising investments.
There are a couple of steps I perform when analyzing an investment to see what factors influence it within its industry.
Check industry performance
First, I like to see how that industry is performing. Is it on the way or in the way? Winning investments can be found in underperforming industries, but you'll have an easier time boosting your portfolio's performance if it's on the way up.
To do that, I go to BigCharts.com, which provides chart and data services to financial websites including The Motley Fool. On the site's main page, the industries link goes to the top 10 best-performing industries over the past three months. As I write this, consumer electronics has scored the greatest percentage gain, up 58.42%. I like to make sure that it has some staying power too, so I also check how it has performed over the past six months. While it places second to mining for this time period, consumer electronics has still grown a healthy 63.05%, and Harmon International
I also go to BarChart.com, another provider of chart and data services with a wealth of free information available to individual investors. It gives me a list of more than 200 industries sorted by the site's proprietary "weighted alpha," a method of measuring the overall performance of the industry against the other industries. Winning industries are colored green, losing ones red. It's another quick check to see how the industries themselves are performing.
What do the insiders think?
An important concept in analyzing a company is trends occurring within its industry. Trade journals can provide a wealth of information on who industry leaders are, what trends are shaping the industry, and important facts in general that you should consider for your investment. Industry news stories are also found there.
While almost all trade journals have a printed version, you can find a lot of them on the Internet. PrimediaBusiness.com is a leading source of industry trade journals, featuring more than 70 publications and hundreds of websites and newsletters covering apparel, security, financial services, mining, power, real estate, and more. It should be a first stop in boning up on your investment's industry.
Gebbieinc.com is another site offering hundreds of trade journals available on the Net. For example, investors in Buffalo Wild Wings
If I can't find what I'm looking for in either of those two places, I'll use Google
Understanding the trends shaping an industry, the issues that face it, and how the industry responds to them can help lead your portfolio to industrial-strength returns.
For related Fool takes, see:
Take a free 30-day trial of Motley Fool Hidden Gems today to see which companies have been highlighted as promising investments.
Fool contributor Rich Duprey has been said to have a lot in common with certain anatomical features of a baboon. He does not own any of the stocks mentioned in this article.
More from The Motley Fool
3 Things to Watch When This Top-Performing 3D Printing Company Reports Q4 Earnings
The company behind the "best 3D printing stock" reports fourth-quarter earnings on Thursday, Feb. 8.
Tech Is Walking Away From Wearables
What we did and didn’t see at CES, and what that means for the biggest trends in the tech industry.
Nintendo Switch Is the Fastest-Selling Console in U.S. History
And it could be on pace to become the best-selling console ever. How has Nintendo worked this magic?