Qualitative Analysis

As discussed on other pages on our website, there are numerous methodologies used by individuals and professionals to analyze common stocks. In this post, we will be discussing “qualitative analysis.” The below information is general in nature. It is not met to be complete in all material respects. It is being provided for educational purposes only and should not be relied upon as legal or investment advice.

Fundamental analysis is expansive in the factors that are considered when performing this discipline. In this post, we will consider some of the qualitative factors used in making a stock selection.

One of the most important factors when looking at a company is its management. Upper management make the decisions that affect the success or failure of the company. You should perform some research to find out who is running the company, how long they have held their positions and where did they come from.

It is also important to know what the management philosophy of the company’s chief executive officer, chief financial office and chief operating officer is. What type of style do they use? Are they personable, promoting an open, transparent and flexible way of running the business as opposed to management philosophies that are more ridged and less adaptable, valuing policy and established logic above all else in the decision-making process? Many times, management style can be ascertained from reviewing the company’s annual report on form 10K, especially in the section labeled Management Discussion section. Annual reports for all reporting company’s can be found of the SEC’s Edgar website.

After getting comfortable with the quality of a company’s management, it is important to understand the business model of the company. Simply, what does the company do and how does it make money? For example, will the company’s business or profits be affected by rising oil prices, rising interest rates or other materially adverse economic factors?

The next step in the process is to analyze the characteristics of the industry segment in which the target company does business. Put another way, what is the growth potential of the overall industry in which the company is involved.

An average company in an above average industry can provide a positive return, while an average company in a poor industry will likely not perform up to expectations.

A company’s market share will also have a material impact on how to factor in industry segment and competition factors.

A well-known brand name reflects years of product development and marketing and many times has a positive impact on stock performance. However, please keep in mind that you might want to think twice about companies branded to one individual.

As with all investment strategies, they are far harder to understand and implement than most people realize. Consequently, you may want to contact an investment professional to assist you in implementing your investment plan.