10:31 AM, 23 Aug 2019 (AUS EDT)   The market is currently open       

Fundamental Analysis of Stocks: Qualitative Factors of the Company


Qualitative factors are more difficult to define than quantitative. Part of the reason could be due to qualitative factors are often difficult to attach to hard numbers and statistics. None-the-less, trying to access the quality of a stock is vital and directly relates to how well it will perform in the long term. What factors will should we consider as regards qualitative analysis as it pertains directly to the company?

  • The management team
  • The business model
  • The competitive edge
  • Corporate governance policies

Qualitative factors #1: The Management Team

Imagine climbing aboard a bus and finding the driver hung-over and sleeping while passengers are loading on. Would you feel safe in such an environment? Hardly. The same is true of the management team of a company. Their leadership, alertness to change, proficiency, and acumen will directly relate to the safety and profitability of a company.

How do you find out such information? It is highly unlikely that you will be able to schedule a face to face meeting with the high level executives. There are other ways to determine competency of the management team.

1. Research the Top Brass

Going to the corporate website will yield the names of upper management. Pay little attention to the rave reviews that the company posts about its members… it has to. No company is going to highlight the weaknesses of their upper level management. With these names you can quickly do your own research on the Internet. A few strokes of the keyboard can reveal previous companies they worked for along with relative successes or failures. True leaders usually distinguish themselves from the pack.

2. Conference Calls

Listen carefully not to just the hard numbers which is quantitative, but also how the management presents itself. When cross-examined by the average investor are they forth-right and honest or do they dodge questions behind a multitude of double-speak?

3. Forward-looking Statements

Company issued reports will usually have forward looking statements as to what the company hopes to achieve. If you review the previous few years worth of reports you should get a good feel as to how management is progressing and able to adapt over time. For instance, look at their statements of five years ago. Did they achieve those goals? Did they continue to modify their action plan smartly over time and according to market conditions? If the forward-looking statements continually consist of "pie in the sky" ideals without any real substance or implementation, this may mean the management team is having problems implementing high-flying ideals.

4. Ownership of Stock

Does management have confidence in its own stock? If they do, no doubt they will be holding a substantial amount of options and shares. In addition to the amount of insider ownership, look to what management does with their shares. If insiders are in the habit of dumping their options frequently, this may mean that they have little confidence in their own stock.

Qualitative factors #2: The Business Model

Warren Buffett is noted for his picking stocks based on his ability to understand how the company works. If the business model is confusing, complex, or difficult to implement this may eventually lead to a chaotic breakdown, or at least a loss of profits due to inefficiency.

Most stock market portals will have links to a company's profile which states what exactly their business does. Some questions to ask:

  • Do I understand how this company works?
  • Is their model for making revenue simple and straight-forward?
  • What personal knowledge of this field of business do I have?
  • Does this feel right?

For instance, just before the dot-com bust many people who had never even used a computer were phoning up their broker to get aboard the wave. These people had no idea of what was happening in the technology sector or how it made money. All they knew was that prices were rising and they wanted a piece of the action. These ones lost massive amounts of money. Those like Warren Buffett that stayed away from businesses they knew little about stayed safe and weathered the storm.

Make sure the business model is clear by your standards before investing.

Qualitative factors #3: The Competitive Edge

The market is made up of leaders and laggards; there are companies that are competitive and others that follow the pack and are bought up as sympathy plays. Make sure that your company is the former.

To gain insight into your company's edge, look for such things as:

  • Market share
  • Product branding
  • A more proficient operation than competitors
  • A household name that distinguishes itself from the industry average

As an example, certain names come to mind when such products as cola, tissue paper, snow mobiles, and fast food are mentioned. Why are these companies used as household names? Likely they have the competitive edge with smart advertising and good placement in the market.

Qualitative factors #4: Corporate Governance Policies

Corporate governance refers to the policies, laws, principles, and customs that the company abides by. It sets the groundwork for the relationship between management, the shareholders, and the board of directors.

Two key areas of policy that are worth looking at are:

  1. Transparency of policy and
  2. Responsibility to the shareholder

Transparency of information is in regards to the amount of free-flowing data made available to the shareholder. Is the information divulged and reported by the company shrouded in oodles of irrelevant data or are the reports clear and easy for the average investor to follow? A mining company can try to hide substandard drill findings in a stack of reports or they can be forthright and announce that ore samples were below their expectations.

Next is responsibility to the shareholder… does the company have policies in place to allow shareholder input if necessary? What if the company made a slew of bad decisions, are they responsible to the shareholder? Can shareholders call meetings under certain circumstances? Does the company have a policy to protect itself against a hostile takeover? If the company pretty much ignores the average shareholder treating them as little more than invested money, this is a serious strike as regards corporate governance.

Summary of Fundamental Qualitative Analysis

Researching into a company's fundamentals requires a lot of perspiration and hard work. The payoff, of course, is that you own a quality company that will appreciate in value over time. While numbers are easier to crunch, there is a lot to be told about how a company runs and its ability to make profit by examining the qualitative factors with fundamental analysis.