A Guide to Performing Extensive Company Analysis - Introduction
Investment research is a very important thing for any trader. Broadly, traders can do two types of investment researches. First, they can do technical analysis. This is usually more important for traders who want to enter and exit trades within a short period. Second, they can do fundamental analysis. This involves looking at the broad issues surrounding an asset. For example, fundamental analysis about currencies can involve looking at the underlying economic data. In this article, I will look at the best way to conduct an extensive study on a company you want to invest in.
- Start at the top
To do an extensive study, you first need to start at the top. This involves looking at the world today and imagine how it will look in the next ten years. For example, you can look at the vehicle manufacturing industry and imagine how the world will look in that period. Today, every person in the vehicle industry is talking about electric vehicles and autonomous driving. Countries like China and the United Kingdom have set a target to banning the combustion engine. This means that we will see a lot of investments in the electric vehicle industry. Therefore, when analyzing a car company, you need to look at this macro-theme and decide whether the car company you want to invest in has an edge in the industry.
In the example of cars, you should only invest in companies that are shifting gears to the electric and autonomous vehicles. Equally, what happens to the petroleum industry when this happens? With reduced demand in the oil industry, chances are that oil companies that don’t pivot to the electric sector will lose out. Therefore, in the long-term, it would be unwise to invest in oil and gas companies that are not shifting gears to the new electric industry.
- Focus on the company and its competitors
After looking at the macro theme and finding companies, you should now find companies that will be leaders in the next decade. A good example is to look at the e-commerce industry. In the next ten years, more people will be shopping using e-commerce. Retailers that don’t shift to the e-commerce direction will likely go bankrupt in the next few years. Therefore, you can look at companies like Amazon and Walmart that are increasingly investing in e-commerce.
After finding a company, you should also consider its competitors to find the company that will likely dominate the market in the next ten years. In the case of Amazon, you can look at companies like Walmart and eBay. Your goal here is to find a company that has a better chance of being big in the next ten years.
- Look at the financials
After narrowing your search, you should focus on the company’s financials and its management. In this, you goal is to find a company that has good finances and is led well. Your goal is to find a company that has the funds to continue making long-term investments. Therefore, look at a company like Amazon or Alibaba that have the cash flow to fund their next investments and growth.
After narrowing your analysis, you should now look at the valuation of a company. A company might have the best products but be overly overvalued. The rule of investing is that you should never overpay for an investment. A good example is what happened during the dot com bubble. During the bubble, CISCO was worth more than $500 billion. This is because investors expected its products to dominate the market. Surely, the company’s routers have the biggest market share. However, competition eroded the company’s market share and people who bought the stock made huge losses. Therefore, to avoid this situation, you should do your best to buy a company that is not highly valued. To do this, you can use several valuation models. However, the most appropriate one is comparing the company’s price to earnings ratio with that of its competitors. Ideally, you should invest in companies that have low or reasonable PE multiples.