Key Questions Stock Investors Should Ask about Industries and Sectors - dummies

Key Questions Stock Investors Should Ask about Industries and Sectors

By Paul Mladjenovic

Your common sense is an important tool in choosing sectors and industries with winning stocks for your investment portfolio. Below are some of the most important questions to ask yourself when you’re choosing a sector or industry.

Is the sector growing?

The question may seem obvious, but you still need to ask it before you purchase stock. If you look at three different stocks that are equal in every significant way but you find that one stock is in a sector growing 15 percent per year while the other two stocks are in sectors that have either little growth or are shrinking, which stock would you choose?

Sometimes the stock of a financially unsound or poorly run company goes up dramatically because the sector it’s in is very exciting to the public. The most obvious example is Internet stocks from 1998–2000. Sooner or later, however, the measure of a successful company is its ability to be profitable. Serious investors look at the company’s fundamentals and the prospects for the industry’s growth before choosing a particular stock.

To judge how well a sector or industry is doing, various information sources monitor all the sectors and industries and measure their progress. Some reliable sources include the following:

The preceding sources generally give you in-depth information about the major sectors and industries. For example, The Wall Street Journal (published by Dow Jones & Co.), whose website is updated daily (or more frequently), publishes indexes for all the major sectors and industries so that you can get a useful snapshot of how well each one is doing.

Standard and Poor’s (S&P) Industry Survey is an excellent source of information on U.S. industries. Besides ranking and comparing industries and informing you about their current prospects, the survey also lists the top companies by size, sales, earnings, and other key information. Each industry is covered in a few pages, so you get the critical information you need easily.

The survey and other S&P publications are available on the S&P website or in the business reference section of most libraries.

Are the sector’s products or services in demand?

Look at the products and services that are provided by a sector or an industry. Do they look like things that society will continue to want? Are there products and services on the horizon that could replace them? What does the foreseeable future look like for the sector?

When evaluating future demand, look for a sunrise industry — one that’s new or emerging or has promising appeal for the future. Good examples of sunrise industries in recent years are biotech and Internet companies.

In contrast, a sunset industry is one that’s either declining or has little potential for growth. For example, you probably shouldn’t invest in the DVD manufacturing industry because demand is shifting toward digital delivery instead. Owning stock in a strong, profitable company in a sunrise industry is obviously the most desirable choice.

Current research unveils the following megatrends:

  • The aging of the U.S.: More senior citizens than ever before are living in the U.S. Because of this fact, financial and healthcare services that touch on eldercare or financial concerns of the elderly will prosper.

  • Advances in high technology: Internet, telecom, medical, and biotechnology innovations will continue.

  • Security concerns: Terrorism, international tensions, and security issues on a personal level mean more attention for national defense, homeland security, and related matters.

  • Energy challenges: Traditional and nontraditional sources of energy (such as solar, fuel cells, and so on) will demand society’s attention as it faces Peak Oil (shrinking supplies of the world’s available sweet crude oil).