Company Analysis for Stock Investors During Recessions
As a stock investor, you must understand how to perform company analysis to determine if a company is worth the stock price. Especially during a recession. Bankruptcy becomes a reality for many companies during economic downturns.
You can analyze a company in various ways, including a SWOT competitive analysis, fundamental analysis, and even technical analysis.
It is crucial that you learn how to combine forms of analysis to determine your overall view of stock investments. The most optimal opportunities on the stock market will align with the current economic conditions and look good from a technical perspective.
What is a Company Analysis?
A company analysis may refer to many types of economic research about a company. In layman’s terms, company analysis refers to the research you do to determine if a company is a good investment.
Once you learn about all the different forms of stock research, you will find what makes the most sense to your investment strategy. Many retail investors rely on the internet and investing gurus to make decisions for them. If you do not understand how to perform a company analysis, you will blindly follow and have no conviction in your investment.
How to Analyze a Company
Understanding how a company makes money is crucial regardless of the company analysis method used. You are gambling more than investing if you do not understand how a company operates and generates cash flow, you are gambling more than investing.
Utilizing one form of analysis is insufficient because the best opportunities align when they look good with multiple forms of research. Many companies can seem like a good investment with one form of analysis and look like a bad investment with another.
SWOT Competitive Analysis
A SWOT competitive analysis determines a company’s strengths, weaknesses, opportunities, and threats. Initially, you should make a simple table and write examples of these factors. For example, a company may excel at marketing but have a weak product. The objective is to understand every part of a business and make data-driven decisions.
While a SWOT analysis is not a common method for valuing stocks, it is a great way to understand the company you are looking to trade. Additionally, when performing a SWOT analysis, you may find a competing company you like as a better investment.
A crucial part of taking full advantage of a SWOT analysis is being able to act on the data you receive. If you don’t understand how to make impactful data-driven decisions, all forms of research do not matter.
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Porter’s Five Forces
Porter’s Five Forces is a tool used to analyze the competitive landscape of an industry.
It takes into account the five key forces that affect the profitability of a business: rivalry among existing firms, the threat of new entrants, the threat of substitute products, the bargaining power of buyers, and the bargaining power of suppliers.
By understanding how these forces affect a business, companies and investors can make strategic decisions that will improve their chances of success.
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Fundamental Analysis
You can do fundamental analysis in various ways, including discounted cash flow analysis and reading financial statements. Fundamental analysis is one of the core components of a company analysis because you can see exactly how much money the company is making or losing.
However, just because a company makes money does not mean they are a good value. You must combine multiple company analysis forms before determining whether a stock is a good investment.
You can find some of the popular fundamental valuation methods in my other blog post here.
Technical Analysis
Technical analysis is another way to determine if a company is a good value based on its past performance. Technical analysis is when you analyze a company's historical price movement.
Most technical analysts rely on stock charts to determine a company's overall trend and value on the stock market.
The most common indicators are moving average lines and momentum indicators like the relative strength index. Indicators are great for determining support and resistance levels. A support level is a price at which a stock may bottom, while resistance is a price at which investors may start to sell and secure profit.
20 Stock Research Questions:
Part 1: General Company Questions
What is the company’s mission/value?
What problem does the company *actually* solve?
What does this company do very well at?
What does this company struggle with?
What are the company's potential opportunities?
What are the company’s potential threats?
Part 2: Financial Questions
How does the company make money?
How does their revenue growth look?
Is the company currently profitable? If not, why and when?
How might this company perform during a recession?
How does their overall financial situation look?
Can they raise prices without customers switching to a competitor?
Part 3: Leadership Questions
Are the CEO and executive team the right people for the job?
What is the executive team’s track record?
How have they handled pressure in the past?
What type of culture has the leadership created?
What does the stock “Insider Ownership” look like?
Part 4: Competition Questions
Who are the company’s biggest competitors?
How does this company differ from its competitors?
How powerful is the company’s brand?
How loyal are the company’s customers to their core product?
How does the company’s overall industry look?
How to Perform a Company Analysis: Bottom Line
Before investing in any company on the stock market, you must understand how to determine which companies are the best investments. Performing a company analysis can be done in many ways, and you must understand all of them to be a great investor.
The best trading opportunities arise when a company looks bullish on many forms of analysis. For example, when a company is in a bullish trend, is killing earnings, and generates solid cash flow, you can safely say this company is a substantial opportunity.
Making Impactful Decisions Based on a Company Analysis
Data collection is crucial for company analysis, but the essential part is making data-driven decisions. For example, if you are a long-term investor, you may choose to hold your stocks for many years. However, what if the company starts going south and your thesis changes?
If you pick individual stocks, you must follow earnings and be ready to manage your risk if necessary.
Regardless of how long you plan to hold a stock or how much analysis you have done, there is always a chance that the company will stop performing well. For this reason, great investors like Warren Buffet believe index investing is ideal for most people since they don’t have the knowledge or time to monitor their stock investments constantly.
Long-term investing in index funds is easy since you don’t have to analyze companies and rebalance your portfolio. However, you must be much more involved with your portfolio regarding individual stock picking.
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As Always: Buy things that pay you to own them.
-Josh
Blog Post: #050
