Everyone knows that for a company to become and remain successful, it must pay attention to its competition. When analyzing a stock, investors must also do some competitive analysis.
Companies do not operate in a vacuum. They are in constant competition for consumer and investment dollars. To make the best investment decisions, you need to have a good understanding of the competition facing those companies whose stock you consider buying or selling. In fact, it is always best to analyze stocks in pairs.
When you are evaluating Google’s stock (GOOG), you have to evaluate its performance versus a competitor like Yahoo! (YHOO). If you are studying Google’s PE RatioThe price of a stock divided by the earnings per share. This is a measure of how pricey the stock is and should only be used to evaluate a stock versus its competitors. , Cash Flow per Share Cash flow per share is calculated as the cash flow from operations divided by its total number of shares outstanding. and ROE, you must compare it to the industry averages or its direct competitor’s ratios.
When you are evaluating Boeing (BA) as a company, you must also view its performance versus its head to head competitor like Airbus. When you are evaluating Ford Motor Company (F), you should also me analyzing it against General Motors (GM).
More than financial magic, national or global economic conditions, dedication to Research & Development, or monies spent on marketing and branding, the quality of a company’s competition can affect earnings and cash flow. Avoid making major decisions on purely historical data, as the competition may be about to introduce one or more new products or embark on a massive marketing campaign that could affect another corporation’s earnings and/or cash flow.
There are a few companies that operate in industries without competitors. Intuitive Surgical (ISRG) developed the first surgical robot that performs minimally invasive surgery and reduced hospital stays from 4 days to 1 day in some instances. That stock went from $20 to $325 from 2004 to 2007. FedEx (FDX) initially had the monopoly on overnight package delivery—it took UPS and the United Postal Service a few years to catch up. Crocs (CROX) shoes were the craze for at least a year until other shoe companies started copying them.