13875 Views | October 14, 2019
When it comes to picking stocks, we often do a deep analysis of the company and its business model. While that is required, do you pay attention to the sector or industry the company belongs to? Did you know that about 40% of the movement in the price of a stock is directly related to the industry group in which the stock is placed? Let’s understand this better…
Based on current trends and macro and micro economic factors, specific industry dominates in the stock markets during different time periods. This implies that investors must know which industry groups are on an uptrend and look out for leaders in these groups. One should also keep in mind that a stock that is a leader during one phase of an uptrend of the industry group it belongs to, may not retain its leadership position during the next phase of the bull market. In other words, there is churn in the leadership during each uptrend because as countries evolve, new entrepreneurs emerge on the scene and consequently, give rise to new opportunities for investors.
Shifts in demand trends, consumer preferences and evolution in technology that result in changing consumption patterns will result in a change in uptrending industry. For instance, in the present scenario, uptrending industry groups have moved from traditional sectors like textiles, metal, autos, real estate, etc. to new-age industry groups like insurance, asset management, paints, air conditioners, etc.
This is a little tricky because, as mentioned earlier, a leader in an industry during an earlier uptrend, may not remain a leader during the next uptrend of the industry. Here, one needs to take a holistic view of each player in the industry by assessing the management, specific strengths of the company, its current valuation, growth prospects going forward, etc. While most players in an uptrending industry will see an upward shift in stock valuations, finding stocks that will see the highest rise in valuations is the key to successful stock selection.
If an industry is doing well, associated sectors may also perform well. As an example, when the automobile sector performs well, automobile ancillary companies that supply to this sector also profit. It is, therefore, necessary to expand your research to companies in associated sectors; following the money trail, you may come across other hidden gems.
Markets are churning constantly, and new industries will dominate at different time periods. As an investor, you need to look at the bigger picture to find trends that will dominate the market space in the future.