Effective industry analysis helps to provide a framework for company analysis.
Uses of Industry Analysis
- Understanding a company’s business and business environment: a critical step in stock valuation and credit analysis
- Identifying active equity investment opportunities: helps active investors with a top-down approach decide which industries to overweight or underweight against a given benchmark
- Portfolio performance attribution: measuring how sector selection played into the performance of an active strategy
Which of the following market participants is unlikely to benefit from industry analysis?
A. A loan underwriter at a bank performing due diligence in response to a loan application received from a startup app development firm
B. A technical analyst tracking price movements and investing across a wide variety of industries
C. A data analyst working for an investment consulting firm working on a performance attribution analysis of an actively-managed fund within a client’s portfolio
The correct answer is B.
Since the technical analyst invests in different industries, investment decisions are made based on historical price movements and not industry fundamentals.
Options A and C are incorrect. The loan underwriter can benefit from industry analysis to better understand the risks of lending to the app development firm, and the data analyst can extract the amount of outperformance or underperformance attributable to industry or sector selection.
Reading 40 LOS 40a:
Explain uses of industry analysis and the relation of industry analysis to company analysis