Researching A Company’s Competitors Before Purchasing Its’ Stock
How important is it for an investor to study a company’s competitors before purchasing its’ stock? Very important! Researching and comparing the company’s competitors can inform the investor of the “better” buy.
Does the company you are interested in have a competitive advantage? As Warren Buffett states: “A company that has a competitive advantage is likely to remain in the industry for the foreseeable future. “Is it a company that performs better than its’ rivals? Does the company have superior profit margins? Are its’ sales growing? You can compare companies in the same industry by researching them online on any financial website.
Does the Company Have a Strong Moat?
A “moat” is an exclusive advantage the firm has over other companies. Preferably, the investor will choose a firm that has a moat. Warren Buffett states: “When we see a moat that’s tenuous in any way–it’s just too risky.” A good example of a firm possessing a moat would be Coca-Cola. The recipe to Coke has been hidden for years allowing the company to excel in the beverage industry. Another good example of a firm with a moat would be Apple. Many consumers are loyal to its’ brand name. This allows Apple to charge higher prices for its’ products over its’ competitors.
Example of Researching Two Competitors In the Retail Industry:
It is wise to conduct research on at least several of the company’s competitors! For example, in the retail industry, you could compare Wal-Mart with Target. Wal-Mart, for instance, as of this writing, has a PE (price-to-earnings ratio) of 26.07 whereas; Target has a PE of 13.70. This tells you right away that Target’s stock is cheaper based on its’ PE.
As I write this, one share of Wal-Mart costs: $98.21 and one share of Target costs $65.39. However, Target’s lower price doesn’t necessarily mean its’ the better buy. You should not act on share price alone! Instead, study “each” company’s fundamentals (statistics) before making your decision.
For even further comparison, you may want to look at Wal-Mart and Target’s other competitors such as Costco and Kohl’s. It is to the investor’s advantage to be thorough when comparing companies before investing!
Which Company Pays The Highest Dividends?
You should also take into consideration the dividend yield of “each” company…as you want to strive for dividend income, whenever possible. The dividend yield is expressed as a percentage and will tell you how much a company pays out in dividends each year relative to the company’s share price. This way you receive income from the dividends and capital appreciation (gain). In the example provided above, Target has a higher dividend yield than Wal-Mart. Dividends are paid out to the investor quarterly.
Is the Company Excelling Above the Rest of Its Competitors?
If one company is excelling above the rest of its competitors, year after year, it’s a no-brainer that that’s the company you want to buy! But make sure you conduct your research first! Do your homework! Look for consistency and a good profit margin.
You don’t want to overpay for a “superior” company. Check the P/E of the company. Keep an eye on the price of the stock and try to get in at a good price! Your goal should be to try to buy it when it is on sale.
I have spent hundreds of hours studying investments and reading everything I can get my hands on related to Investing, Finance, and Money. It is to an investor’s advantage to read, read, read. With the proper study and financial skills, you’ll be taking less of a risk and see your returns steadily increasing!
In conclusion, an investor would be wise to compare a company’s closest competitors before purchasing its’ stock. Is the company the leader in its’ industry? Does the company have a strong moat with a competitive advantage?
Be sure to compare the price to earnings ratio of each company to see how expensive the individual company’s stock is. Also, try to aim for dividend-paying companies, whenever possible, and always look for companies with great profit margins.
