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.