Stock selection is a critical aspect of portfolio management. In finance theory there is lot of emphasis given on the stock selection process that focuses on two different approaches: top-down investment approach and bottom-up investment approach. Industry analysis is an integral part for most investors looking to create wealth in the equity markets. Says Chetan Bhosale, an investor who adopts the top-down investing approach: “Industry analysis is extremely crucial to beat markets and safeguard your money in the equity markets. There is no point in investing in an excellent company with great management and healthy balance-sheet if the industry it operates in is struggling.”
“I would prefer to invest in a quality company that is operational in an industry that is in the growth stage and not in a company with great management and track record operational in a struggling industry. I have seen many investors being clingy to stocks that are operational in a struggling industry. For example power, telecom and automotive about three years back. I have no doubt that industry analysis is as important as stock analysis, if not more. Once you get your industry analysis correct, it can open a Pandora’s box of opportunities for investors,” he adds. It makes sense to target investments where the industry prospects are bright and the demand-supply situation is in favour of the industry players.
For instance, there is no point in buying stocks of an airline company with a great track record if the whole industry is on the verge of collapsing. There are several ways to identify industry prospects and trends which may help investors take profitable investment decisions. One of the best ways to gauge the attractiveness of any industry is to study the revenue growth and growth in profits of the listed players in any particular industry. The table below highlights how with the best growth in sales reported over the past three to five years, chemicals, FMCG and healthcare have remained attractive. The data reveals that a maximum number of multi-baggers in the past three to five years have been from these three sectors, especially healthcare and chemicals.
1) Embryonic Stage
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