A great company in a dying industry is still a hard place to make money. That's why smart investors look at the sector before the stock. Here's a simple five-question framework that works for any industry. This is for learning only.
The five questions
1. What does the sector do, and what drives its demand? Every sector runs on something. IT services run on global tech spending and a weak rupee; banks run on loan growth; cement runs on construction and infrastructure. Find the one or two forces that really move it.
2. Is it growing or shrinking? Look for tailwinds (rising demand, government push, new technology) or headwinds (falling demand, disruption). A rising tide lifts most boats in the sector.
3. Who are the leaders, and what protects them? Identify the strong players and their moat — the thing that keeps competitors out (scale, brand, technology, licences). Leaders usually survive bad times best.
4. What can hurt it? Every sector has a weak spot: input costs (crude for paints and tyres), regulation (banks, pharma), cycles (metals, real estate), or currency (importers). Know the threat before you buy.
5. Is it cheap or expensive? Compare the sector's valuation to its own history. A great sector bought at a sky-high price can still disappoint.
Three quick examples
- IT services: watch US/Europe tech spending, deal wins, and the rupee.
- Banks: watch loan growth, bad loans (NPAs), and the interest margin (NIM).
- Pharma: watch US FDA approvals, generic drug pricing, and the domestic market.
How to use it
This is the top-down approach: first find strong sectors, then hunt for strong companies within them. It stops you from buying a good company fighting an impossible industry. Combine it with company-level research — see how to research a stock before you buy.
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