The Aleph Blog » Blog Archive » On Researching Industries

On Researching Industries

From a reader:

Hi David,

I’ve been a classic “bottom-up” investment advisor for a few years now, but I agree with your assessment that industries, in general, are under-analyzed by the masses.

What is the best way to learn about a particular industry? Are you aware of any comprehensive publication that sheds light on both the qualitative characteristics of an industry and the appropriate valuation methods?


There are several ways to learn industries.  I’ll try to explain:

1) You can choose a bunch of companies in an industry, email the investor relations area, and ask for packet equivalent to what they send buy-side analysts.  I’ve done that at various points in time for industries I wanted to learn.  Compare and contrast.  Who is doing well, badly and why?  In the mid-90s, I did this for the trucking industry, and learned a ton of information.  I also talked with some trucker friends of mine who gave me on the ground data.

2) You can read industry publications.  When I was a buy-side analyst for the insurance industry, I read those regularly.  They exist for almost every significant industry.

3) You can go to industry meetings.  Almost every industry has meetings where they discuss industry conditions.  Just don’t be too pushy in trying to get information.  Be interested in the industry as a whole, and don’t try to gain material nonpublic information.

4) Value Line & Morningstar both provide industry analyses.  So do most major investment banks.  You can review those and compare and contrast.

5) You can use the quality screen to look at what industries have a rising ratio of gross profits from operations, versus a falling ratio of gross profits from operations.  Here is a chart from the last seven years:


The colored field reading “Chg” is the difference between the average of years 1-3 and years 5-7.  Profits are noisy, that’s why I did an average.

Gross profits from operations as a fraction of assets [GP/A] is a good measure of the quality of an industry, and whether their sustainable competitive advantage is is improving or declining.

Now, when I look at a measure like that, I do one of two things:

  1. I buy cheap companies with strong balance sheets among those industries where GP/A has fallen hard, and buy them, knowing that they are survivors, and will rebound.
  2. I buy moderately strong companies in industries where GP/A has been improving, and after research, the trend is not well understood.  It helps if the industry is dull, and few people follow it.

That’s what I do.  Whatever you do, size it to your own abilities, or the abilities of your firm.  Beyond that, look at cheapness of a company relative to normalized earnings, i.e., average earnings over a full market cycle.

Industry Rotation, Portfolio Management, Stocks, Value Investing | RSS 2.0 |

2 Responses to On Researching Industries

  1. Greg says:

    David – Just curious of your reason for using operating earnings (profits) instead of GAAP earnings?

    Both numbers have their flaws of course. But GAAP earnings are (roughly) an apples to apples comparison, the same GAAP flaws apply equally to all.

    “Operating” earnings involve a huge amount of management discretion… some wall street insiders like to mock EBITDA as “earnings before expenses and management mistakes”. The definition of “on-going business units”, which are the only ones that “count” toward operating earnings is not standardized … the company / shareholders are still on the hook for all the losses and problems of the non-continuing business units unless and until they are sold.

    GAAP has plenty of flaws too — but those flaws apply equally to all companies (they are standardized). And equally important, the flaws are well known and well documented … an investor knows the limitations of the model (or can easily look them up).

    I like your idea of looking at 7 years of data — roughly one typical full business cycle.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

 Subscribe in a reader

 Subscribe in a reader (comments)

Subscribe to RSS Feed

Enter your Email

Preview | Powered by FeedBlitz

Seeking Alpha Certified

Top markets blogs award

The Aleph Blog

Top markets blogs Bull, Boards & Blogs

Blog Directory - Blogged

IStockAnalyst supporter

All Economists Contributor

Business Finance Blogs
OnToplist is optimized by SEO
Add blog to our blog directory.

Page optimized by WP Minify WordPress Plugin