researching a stock as a business
DESCRIPTION
This presentation talks about researching a stock as a business. Stock is a representation of ownership in a company.TRANSCRIPT
Researching a Stock As
a Businessa Business
Financial Condition
The Industry
Market Conditions
Business Model
� Just like a bank investigates or researches you before
they give you a loan (an investment in you), you must
investigate any business before you invest in it.
Researching a particular business or stock helps you
gauge the risk of your investment. As a result, you
are able to make a sound and educated investment
Introduction
are able to make a sound and educated investment
decision.
� There are several things you should look at
before investing in any company, including:
• Financial Condition
• The Industry
• Market Conditions
Introduction, cont’d
• Market Conditions
• Business Model
FINANCIAL
CONDITION
� The financial condition of a company is a good gauge
of how well the company is performing. Just like an
x-ray provides a doctor a wealth of information, the
financial condition of a company can tell us lot about
the well being of that
Financial Condition
company. The financial company. The financial
condition of a company
includes the Profit/Loss
statement, otherwise
known as the income
statement and the
balance sheet.
THE INDUSTRY
� It is very important to look at the industry that a
company is involved in. This defines the companies’
primary business. Industries are further broken
down into sectors.
The Industry as a Whole
� For instance, the retail industry is broken down � For instance, the retail industry is broken down into several sectors that include:• Grocery Retail (Krogers)• Drugstore Retail (Walgreens, CVS, Rite Aid)• Specialty Retail (Home Depot, Leowes)• Clothing Retail (The Gap, Banana Republic)• General Mass Merchandise Retail (Wal-Mart,
Target, K-mart)• Department Store Retailer (Macy's)
� If you are interested in investing in a company, you
need to understand the company’s industry and
sector. Once you verify the industry, you will be able
to determine valuable information about the
company.
The Industry as a Whole, cont’d
MARKET
SHARE
� Market Share - You will know if this company is one
of the leaders in its industry and/or sector based on
its market share. You can also see if the market is
saturated, which means there are a lot of
competitors in one industry.
Knowing a company’s industry tells you:
� Market Share is the � Market Share is the
percentage of sales in
regards to everybody
involved in the
industry.
� The soft drink market/industry, which includes Coke,
Pepsi and Dr. Pepper, generates $500 billion sales
annually as a whole:
• Coke generates $250 billion
• Pepsi generates $125 billion
• Dr. Pepper generates $125 billion
Example of Market Share:
50%
25%
25% Coke
Pepsi
Dr. Pepper
• Dr. Pepper generates $125 billion
� Coke has a 50% market share. Pepsi and Dr. Pepper
each have a 25% market share.
� Coke is the market leader.
INDUSTRY
TRENDS
� Industry trends tell us how a business is changing.
� For example, in the past the media industry was
dominated by newspaper, TV and magazines. The
emergence of the internet as a media force has
changed the outlook of the entire media industry.
Industry Trends
� Industry Practices or Norms - In some industries,
such as retail, a 3% profit margin is good. In other
industries, a 3% profit margin is horrible.
� You will know if a company is performing above or
below industry standards based on your knowledge
of industry practices or norms.
Industry Trends, cont’d
of industry practices or norms.
� Note: Profit Margin is equal to profit as a
percentage of sales.
MARKET
CONDITIONS
� The market condition refers to the overall
environment pertaining to the customer's
demand and ability to buy. This directly effects
the sales of a company.
� Of primary importance is market conditions in
Market Conditions
� Of primary importance is market conditions in
their current state.
� The environment involves:
• Social Changes
• Economic Changes
• Weather Irregularities
• Disease
Market Conditions - Environment
• Disease
• Government Intervention
� Examples of the Market Condition due to
changes in the overall environment…
Market Conditions - Environment
� After the attack on the World Trade Center, the
airline industry took a devastating blow to sales.
However, the defense and security industries had
increases in sales.
Example of Market Condition:
� With the aftermath of Hurricane Katrina the hotel
industry especially in the neighboring cities had an
increase in sales. Oil and Gas companies had spikes
in sales due to evacuation efforts.
Example of Market Condition:
1) Since state governments heavily tax cigarettes,
cigarette companies may have issues with sales.
2) Since people realize that tobacco smoke causes
cancer, this may trigger people to stop smoking,
which will hurt cigarette sales.
Example of Market Condition:
BUSINESS
MODEL
� The business model is simply a blueprint of how the
business operates and how it makes its money. A
business model can tell you:
• If the business is run efficiently or if its mismanaged.
• How many ways a company earns money.
• The company's business strategy.
Business Model
• The company's business strategy.
� Within each industry there are standard business
models. Each company within that industry has
customized this standard model to their
specifications. The difference in the business model
is what gives a company its edge against the
competition.
Business Model, cont’d
competition.
� Business models are always
changing.
� Most important is how the
company makes its money.
If after viewing the business
model you cannot clearly
Business Model, cont’d
model you cannot clearly
see what the product or
service is, then you should
not invest in that company.
� A business model will tell you what lines of
business the company is involved in.
� Most companies have multiple lines of
business and several sources of revenue.
� Lines of business are simply the industries,
Business Model, cont’d
� Lines of business are simply the industries,
markets, or sectors that a company is involved
in.
� For instance PepsiCo's
primary business is soft drink beverages; however its other businesses include Frito Lay, which is part of the snack foods
Examples of Business Models:
part of the snack foods industry.
� Microsoft's primary business is software, however it is also involved in the video game console business, the Xbox.
� Most importantly, before making any
investment decision in anything you must do
your research. When investing in stock you
should look at the financial condition of the
company, the industry, market condition, and
In Summary:
company, the industry, market condition, and
the business model. If you understand these
factors, then you can make an educated
investment decision.