Analyzing An Industry

Picking an industry first, and then trying to find the best stock in that industry, is not our favorite method of finding a good idea. However, it would be unfair to call this a horrible method.  From a practical point of view, it is often a young analyst’s first assignment so we will spend some time making some general suggestions about how to best perform this task.

Our most critical suggestion – Cast a wide net.  Try very hard to find all the companies that are in an industry. Never trust a list from any source.  Quite often there are companies on the fringe of an industry that are very important.  Since these companies are not easy to classify they are often under-covered by Wall Street, and frequently misunderstood.

For example, if you are looking at the defense industry (see DEFENSE INDUSTRY) almost every list will not include Oshkosh Truck. OSK makes many large commercial vehicles, but they are also an important military contractor. Same thing for many smaller defense electronics stocks, they are often classified under technology or some other heading. This is one of the most frequent mistakes we have seen made by inexperienced analysts. Start out by casting a wide net, you can always quickly eliminate companies after a brief glance at there basic characteristics.

We can see arguments for and against analyzing international companies when looking at an industry.

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