Now that we’ve covered the top-down method, let’s pick some stocks. This chapter walks you through analyzing individual Materials firms using the top-down method presented in Chapter 7. Specifically, we’ll demonstrate a five-step process for analyzing firms relative to peers.
Every firm and every stock is different, and viewing them through the right lens is vital. Investors need a functional, consistent, and reusable framework for analyzing securities across the sector. While by no means comprehensive, the framework provided and the questions at this chapter’s end should serve as good starting points to help identify strategic attributes and company-specific risks.
While volumes have been written about individual security analysis, a top-down investment approach de-emphasizes the importance of stock selection in a portfolio. As such, we’ll talk about the basics of stock analysis for the beginner-to-intermediate investor. For a more thorough understanding of financial statement analysis, valuations, modeling, and other tools of security analysis, additional reading is suggested.
As covered in Chapter 7, you can use the top-down method to make your biggest, most important portfolio decisions first. However, the same process applies when picking stocks, and those high-level portfolio decisions ultimately filter down to individual securities.
Step one is analyzing the broader global economy and identifying various macro “drivers” affecting entire ...