Ch 13 - Industry Classification Flashcards
Ways to categorise shares:
Market cap
Marketability
P/E ratio
Size
Dividend yield
Level of gearing
Exposure to overseas earnings
Cyclical vs defensive shares (exposure to economic cycle)
Country
Stock exchange
ESG ratings
Industry
Features are closely related
Reasons for categorisation by industry:
Practical for analysts to specialise in one area
Correlation of investment performance
It is practical for analysts to specialise in one industry because:
Fuck PECS
Factors affecting one company are likely to be relevant to others in the same industry
Assists in portfolio classification and management
No one can expect to be an expert in all areas
Info will come from common source and presented in a similar way
Grouping of equities gives structure to the decision-making process
Share prices are correlated because:
a SMR
Similar financial structures and so are similarly affected by changes in interest rates
Supply to the same markets so are similarly affected by changes in demand
Same resources so have similar input costs
Difficulties of catergorisation by industry:
Conglomerate companies (several sectors)
Multinationals (several marketplaces)
Differences between companies within the same sector - e.g. due to size or operate within niches of the market
FTSE industry classification system
FT MUG IS HOT
Oil and gas
Large global companies
Commodity price dependent (and priced in dollars) - Risky
Independent of the rest of the stock market
Basic Materials
Mainly produce “intermediate”” goods -Chemical, mining, industrial metals, and forestry & paper
May be significantly affected by the state of the economy and commodity prices
Industrials
GOV GIMP + cyclical
Consumer Goods
Consumer Goods = IBM
Manufacture durables and non-durables
Less cyclical for non-durable consumer good companies
Healthcare
Covers healthcare providers, medical equipment and supplies, as well as pharmaceuticals
Non-cyclical
Consumer Services
Food and drug retailers, general retailers, media and travel & leisure companies
Impact of economic cycle will be greater on the cyclical companies
Labour-intensive
More defensive companies in the group may have high gearing
Domestic market is the most important
Telecommunications
Fixed line telecommunications and mobile telecommunications
Type of utility - But less regulated and hence more volatile
Utilities
GG Cell C, Mtn R Da best
Usually government owned
Non-cyclical
Financials
Banks, insurance and financial services
Tend to be capital intensive
Domestic market is most important
Generally the labour costs are important for many companies in the group
+ know features of banks, general insurers and life insurers (i.e. their gearing and profits)
