Industry trends may be an indicator of how an individual business within an industry will perform in the future. Trends in one industry often affect another, helping or hurting a stock you own, so analyzing several industries is prudent in managing a portfolio. Understanding how to identify and make sense of industry trends will help you determine if a change in the market is likely temporary or could affect your stock long-term.
1. Identify the major players in an industry. These are the ones with most market share, sales or revenue. Find the stock prices and earnings results for these companies and look for similar performances, indicating a trend. Examine earnings and dividends for the last several quarters.
2. Look at quarterly results of businesses within an industry for several years. Some businesses have higher sales and revenues during specific times of the year. Heating oil will obviously have greater demand in the winter. Crops futures will vary by the season. Makers of sporting goods, camping, fishing and hunting gear also have seasonal trends.
3. Examine trends by industry sectors. If one sector is down, it may be reacting to a slump in another, related sector. For example, if the housing market is down, lenders will write fewer mortgages and perform fewer refinances, resulting in a trend of lower earnings for banks. Rising gas prices will hurt an auto manufacturer that sells mostly trucks and SUVs.
4. Track legislation or regulation which that affects an industry. Legislation can affect borrowing rates, cost of production, tax rates and other aspects that impact an entire industry. For example, stricter environmental regulations on producing natural gas, burning coal or offshore drilling will affect the energy sector. Visit the websites of industry trade associations to stay abreast of trends.
5. Look at customer demographics. If a product appeals to a particular age group, demographics can help explain why a trend is occurring in a particular industry. For example, fewer children being born during a certain time period will affect toy and game sales. Mature industries that rely on older workers will have rising labor costs. Use U.S. Census data to examine potential consumer demand.
6. Find industry research reports. Many industries collect and disseminate data to help members of that industry spot and react to trends. Industry reports provide information such as annual sales for the industry, increases and decreases in areas of an industry, similar performance by competitive industries and demographics.
7. Identify competitive industries that might affect another industry’s performance. The rise of cable TV, the Internet and video games created significant competition for the sporting goods industry. The subsequent increase in obesity from lack of physical activity has spawned increased activity in the weight-loss, exercise and healthcare industries and a return by many back to sporting activities.
8. Apply all of the aforementioned research to one industry to determine the effects all of these factors may have on current trends in the industry. Compare short-term trends to multi-year, annual performance of the industry. Determine what specific factors are influencing current trends in an industry to estimate if the trend is short-term, medium-range or likely to occur for a longer period of time.
9. Decide which company or companies within an industry are most likely to benefit from or withstand a trend and consider adding that stock to your portfolio.
Items you will need
- Earnings reports
- Stock market data
- Annual reports
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