Beyond The Looking Glass: Equity Peer Group Analysis

So you’ve found a stock and want to weigh its merits as an investment by comparing it to its peers. The tendency is to over-simplify the process by only considering companies that have similar products. The purpose of this article is to look beyond just the simple reflection of the stock in question and focus on specific characteristics that will improve your abilities as an investor. The three areas we’ll focus on are sector/industry analysis, investing style and portfolio allocation.

Sector/Industry Peers

At times you’ll find that you have a lot of familiarity with a company and its peers. Maybe you worked in the energy industry for 30 years and the energy sector is a natural for you. However, in order to be diversified, it will require you to wade out into unfamiliar parts of the equity market. A popular tool to help categorize companies by industry is the Global Industry Classification Standard (GICS®). You’ll find that many brokers and websites have this information readily available.

GICS History

GICS® has been around since 1999 and breaks down companies into eleven broad economic categories called sectors. From there they break down into 24 industry groups, 69 industries and finally into 158 sub-industries. The sub-industry level is where you’ll find companies that are the most economically similar. Most ETFs are indexed and frequently borrows from the MSCI GICS® classification system.

Many trading platforms allow you to see sector and industry classifications. Anotehr approach is to go to an ETF fund manager’s website and look at the fund’s holdings. Typically, the top holdings will represent the largest companies since the index weights are typically done by market capitalization. Also, the investor relations page for a company will provide you with a copy of its annual 10-K filing that will detail its competitors and collaborative partners for various aspects of their business.

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