Online Investing Hacks

Compare Several Competitors to Identify the Strongest Candidate

A beauty pageant with only one contestant isn’t likely to find the most talented or congenial individual. Likewise with stocks—before you invest, judge your candidate against several of its peers.

Long-term investors often approach their stock selections with the mantra, “Invest in the best.” High-quality, well-managed companies will frequently be the best buy-and-hold investments in your portfolio. By comparing several competitors in the same industry, you can identify the strongest contenders. Another reason to pay attention to a company’s competition is that many financial ratios vary based on the characteristics of each industry. By comparing a company’s financial ratios to those of the competition, you can identify the company’s strengths and weaknesses, and perhaps find a better prospect for your portfolio.

There are two ways to compare a stock to its rivals:

• Compare a contender directly to one of its competitors, particularly if the challenger is a leader in its industry. If the stock you’re studying doesn’t measure up, then it might be best to pass over that company—and perhaps take a closer look at the challenger instead.

• Compare a stock’s financial results to the averages for its industry. When a company compares unfavorably to the industry average, you can do more research to understand why the company differs from the norm. If the stock is of below average caliber in a number of areas, it’s often better to ...