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Picking
the Industry Leaders
In the stock
market, it pays to bet on the leader.
For example,
the share price of Bed, Bath & Beyond, the leading retailer of
linens and home furnishings, soared 220 percent during the past five
years, compared to second banana Linens ‘N Things’ five percent
gain.
Similarly,
investors lucky enough to have purchased Intel’s stock 10 years ago
are savoring a 386 percent return, compared to number two microprocessor
maker AMD’s 41 percent loss.
I could cite
many other examples demonstrating that you’ll make more money
investing in an industry’s strongest competitor, rather than in the
also-rans. Here are some ideas for pinpointing the strongest players.
Assuming that
you know the name of one industry participant, your next step is to
identify the competition. Doing that takes some sleuthing. Most sites
don’t offer competitors’ lists specific enough to be of value.
Best
Industry Sites
Two sites that do offer useful information are Morningstar (www.morningstar.com)
and Hoover’s Online (www.hoovers.com).
Neither is perfect by itself, but you can get good results by using both
together.
I picked the
security software industry to demonstrate the process, because demand
for security software is likely to be strong for the foreseeable future.
Symantec is a prominent name in the industry, and I used it to find the
other industry players. I started with Hoover’s Online.
Although
Hoover’s is mainly a pay site, its free Company Capsule report
includes a list of a company’s top three competitors.
Hoover's
Entering Symantec’s ticker symbol (SYMC) displays the capsule
report, which includes a description of the company’s products and
services, and then the top competitors’ list. For Symantec, Hoover’s
listed Computer Associates, Network Associates, and RSA Security. Click
on each name to see that firm’s capsule report including another, and
usually different, list of competitors.
Read each
business description carefully because some are not really competitors.
For instance, Hoover’s write up showed that security software is not Computer
Associates’ major business. However Network
Associates and RSA
Security are in the security business, and following up on the
competitors listed in their reports yielded a list of four U.S.-based
competitors to Symantec. You won’t pick up all of the competitors at
Hoovers, so use Morningstar to flesh out the list.
Morningstar
On Morningstar, get a price
quote for Symantec and then select Industry
Peers on the Snapshot dropdown menu. Morningstar listed the top 20
companies (by company size) in Symantec’s “Systems & Security”
industry group. The list isn't confined to software security makers, and
in fact, only four were competitors. But the process of eliminating the
non-competitors goes fast. Click on each company name on the Peers list
to display its Snapshot
report and scroll down to the description of operations. Reading that
description tells you if the company’s main business is security
software. Then hit your browser’s Back button and repeat the process
for each stock listed in the Industry
Peers report.
Between
Hoover’s and Morningstar, I turned up six competitors to Symantec:
Check Point Software Technologies, Network Associates, RSA Security,
Entrust, Netscreen Technologies, and Internet Security Systems. The next
step is to identify the most significant competitors.
Identify
Sales Leaders
An industry’s strongest players are usually number one, two or three
in sales, and are gaining market share. Morningstar lists each firm’s
last four quarters' sales total on its Industry Peers report.
Symantec
topped the industry sales chart with $1,242 million, followed by Network
Associates with $966 million, and Check Point Software with $439
million. Internet Security Systems was fourth with only $238 million in
sales. Based on sales, it’s clear that Symantec and Network Associates
are the industry leaders, with Check Point Software as a possible dark
horse. Given their low sales, it’s unlikely that the remaining players
will ever become major contenders.
Market Share
Gainers
A company pulls away from the pack
by increasing its market share, that is, by growing sales faster than
the competition. Both Hoover’s and Morningstar offer annual sales
growth figures, but you’ll be better off using the more recent
trailing twelve-month (TTM) data. You can find that on Multex Investor (www.multexinvestor.com).
Get a quote,
select the Ratio
Comparison report and find the “Sales (TTM) vs. TTM 1 Yr. Ago”
figure for each contender.
The growth
figures were 31 percent and 16 percent for Symantec and Network
Associates, respectively, and minus 19 percent for Check Point Software.
Taking the
sales and sales growth figures together, it’s clear that Symantec is
the sales leader, and since its sales are growing faster, it is gaining
market share over number two player Network Associates. Checkpoint
Software is a distant third and its sales are declining rather than
growing.
When two
contenders are close in sales and sales growth, the most profitable
company is often your best prospect. You can use Return on Assets, which
is also shown on Multex’s Ratio Comparison report, to gauge
profitability (use the TTM figure).
Multex listed
Symantec’s ROA at 6.9 percent compared to 5.0 percent for Network
Associates, reinforcing Symantec’s position as top contender.
More to Do
Obviously, you can’t pick stocks based solely on this simple analysis.
My assumption about the viability of the security software industry may
be off base, or further research may spotlight problems at Symantec
and/or Network Associates that didn’t show up in my numbers.
published 3/9/03 |
