Tracking Sector Fundamentals
By now, you should have an understanding of the Materials sector’s history, structure, and drivers. But how do you keep track of the sector moving forward?
There are really only three items to track:
Higher demand for a static supply level supports higher prices and higher earnings. And regardless of earnings growth, sentiment can get overheated, causing firms to become overvalued in what can become a bubble (though actual bubbles are far rarer than most think). Or it can cause firms to become undervalued, which often happens near the bottom of a bear market and sometimes in bull market corrections. But to understand if a firm is under- or overvalued, you must understand how to track the direction of high-level drivers and fundamentals.
Using Industry Concentration to Your Advantage
You needn’ t track every Materials firm in the world to keep tabs on the factors impacting industries and sub-industries. Tracking the largest and most dominant firms often provides insight on important near-term factors impacting the entire industry (see Table 4.6
for industry concentrations). Quarterly earnings presentations (on company websites), conference calls, and analyst Q&A at the end of conference calls are often good sources (conference call transcripts can be found at http://seekingalpha.com/tag/transcripts
). The 10 largest firms in each Materials industry in the MSCI All Country World Index (one of the broadest ...