How to Compare Stocks of the Same Sector?

 

Looking to make an insightful comparison of two stocks belonging to same industry? If yes, this post will help you gain insights about the factors that must need to be checked while doing any such comparison. Always remember that it is level of research you do before investment decides the fate of the same. So, let’s find out right here.

Whenever it comes to investing in stocks, conducting a comprehensive stock analysis becomes an inherent thing. The sole purpose of this practice is to determine the depth of a company so that you take a sound investment decision. There is no doubt that this activity asks for high amounts of time. However, it is always a great idea to prepare a list of promising stocks that have been performing excellent over time despite the ongoing fluctuations.

Now in regard to the stock analysis, the most commonly checked factors are Price-to-Earnings or P/E ratio, Price-to-Sales or P/S ratio, Earnings Per Share or EPS, Debt-to-Equity or D/E ratio, Return on Equity ROE, etc. Though these factors help an investor to make a worthy comparison, it won’t prove it worth until you compare two companies from the same sector. The best stock broker in India chosen by would help you understand its importance.

According to the leading equity analysts, doing such analysis is a great way of highlighting stocks that are overpriced and those can be a part of the portfolio. Though there are lots of way of carrying out this analysis, doing a comparison with other firms from the sector is the most sought-after way of discovering quality stocks to invest in. Let’s strive to know more below.

Relative Valuation

This valuation is the initial state of stock comparison within the same sector and includes presenting the generalized valuation metrics of one company against its competitors. The process is as mentioned below:

• ·        Pick one financial ratio (P/E, D/E, ROE, etc.)

• ·        Get this ratio for the company that you are looking to explore

• ·        Prepare a list of companies from the sector in which your chosen company lies within

• ·        Discover the chosen ratio for all the companies in the peer cluster

• ·        Examine how the companies stack up

Profitability and Leverage

According to the best stock broker in the country, the two widely preferred factors that can help you examine a company against its competitors are leverage and profitability.

There are a number of conditions that you should keep in mind before finalizing how a specific company matches up to its peers. These include ROE, Return on Assets (ROA), Margins (gross, operating, and profit), D/E ratio, etc. You can go on the same path as mentioned above and get these numbers to perform a comparative analysis.

Another crucial aspect that you must be included is the Expected Annual Earnings Growth. Though there are various options to measure this, the top 10 stock brokers in India recommen to follow 3/4 investment analysts and get an average figure. Pay close attention to this stricture as it tends to influence the company valuation to a big margin. Eventually, investing in a company that features high expected annual earnings growth with solid basics is definitely a great choice.

Company’s competitiveness

You can refer to Porter’s five influencers that enable a person to examine the competitive ability of the company. This is of great importance since the success of any business depends primarily on how the company handles the prevailing competition. This analysis can be done by considering following factors:

• ·        The menace of fresh entry

• ·        Danger of substitution

• ·        Bargaining capability of suppliers

• ·        Bargaining control of buyers

• ·        Competitive scenario