10:35 AM, 23 Aug 2019 (AUS EDT)   The market is currently open       

Fundamental Analysis of Stocks: Qualitative Factors of the Industry


As mentioned in another article, qualitative factors are those intangible qualities that help a company fly high or keep it grounded. Qualitative factors of the company include corporate governance, the management team efficiency, the business model, and the competitive edge. But besides company qualitative factors, what macro issues of quality, those of the industry, need to be considered?

Fundamental Qualitative Factors of the Industry

When looking at the industry group as a whole and relating it to the stock you desire to purchase, consider the following areas:

  • Sustainability of Industry
  • Growth of Industry
  • Company's market share of industry
  • Amount of competing companies
  • Regulations surrounding the industry

Growth and Sustainability of the Industry

Sometimes a company can be making wheelbarrow loads of profit with a low price to earnings ratio but still be a poor company to invest in. Why? Imagine a company that sold a certain type of shoe that became popular overnight. Is the fad likely to last in the long term? That could be highly risky. So too, when looking at the industry group try to determine whether you feel the industry group is sustainable.

The industry might not be sustainable if the customer base is precarious or too specialized. For instance, the entire company might be built on selling copper telephone wires to one specific telecommunications business. With the switch to fiber optics and voice over IP this may not be a good long term bet. As well, with only one customer buying produce, the company this is putting all its eggs in one basket with few alternatives if that customer is lost. Make sure the industry is one that has some staying power.

Also, what are the opportunities for growth? Is the industry one that has little room for increased market share? If the market is already saturated with this product or service, the group as a whole might not experience annual growth. If you see fierce competition over a dwindling market share … run!

Company's Share of the Industry Market

By looking at the overall available market and then the share of that pie that a particular company has, a trader can determine if the company is a whale or a little fish trying to swim with sharks. In all industries there is the giant(s) that control the industry. Once a company has eaten a large portion of the market share up and has held its ground for many years, it may be difficult for a new emerging company to significantly erode that. Look at all the other operating systems created for the personal computer, many of them free and arguably better than what Bill Gates is offering. However, since Microsoft has the market share they thrive while the other PC operating system companies do not.

Amount of Competition within Industry

If a company is particularly innovative they might be one of the first few companies within a new industry. With little competition they will no doubt have an easier time than if there was a large volume of companies competing.

To find out the competition you can research that industry group with almost any stock market portal to acquire a list of companies. If there is a list a mile long, consider the competition fierce. If few companies appear this may give your desired company more of a fighting chance.

If a company has a large market share and little competition, this gives them more flexibility in pricing. If the customer has no alternative but to buy their product from one or very few companies, the business will likely have higher profits due to big demand and few supply chains.

Regulations Surrounding the Industry

Regulations have the ability to hamper growth of an industry or to lend a hand to bolster business. For instance, some companies are regulated by regional policy that put caps on the amount that can be charged for a service. This would have a direct bearing on the company's ability to grow.

On the other hand, a regulation may help a certain business. For instance, maybe it is the policy of the country to have a certain amount of content provided by the indigenous population. In Canada there is a Canada Radio-television and Telecommunications Commission that provides policies for TV, radio, and telephones. Knowing if any of their policies apply to the business you hope to invest in would be worth looking into.

Summary of Qualitative Industry Factors

While it can be easy to get tunnel vision on a certain stock and their earnings, it is wise to study the economic factors affecting the entire industry. To have a sustainable investment one would need to pick an industry that had a potentially long life along with decent growth potential. The company within that industry should have a sizeable market share, as few competitors as possible, and regulations that will not directly harm the company's ability to grow. If these fundamental factors are met for industry qualitative analysis, you will have a much sounder investment than if you purchased based on share price ratios alone.