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Competitive Analysis of Stocks

Competitive Stock Analysis. By far the most important way to value any company is to compare it to others.  By using competitive analysis, you can put to use all of the ratios above and compare them to one another so that you can get a much more complete picture of the stock valuation of the company you are researching. To start a competitive analysis, follow these steps:

1 - Find a list of comparable companies.

A comparable company is any company that is similar to the company you are valuing.  For example, if you are valuing Wal-Mart, you'll also want to look at other public companies like Target, Kohl's, Kmart, Sears, Shopko, JC Penney, Federated Dept Stores, and Saks.  To find a quick list of comparable companies you can search most financial sites by industry and get a list of all stocks that are included in that industry.  I usually use Yahoo Finance.  This is the easiest way to find comparable companies, however it is not a very comprehensive list and many companies are so unique that they do not have identical competitors.  If this is the case, you need to use your imagination.  Find companies that provide similar goods or services, or that have similar business models.  Even if the companies don't do the same thing, if there growth and outlook is similar, the stocks will often be valued similar, and you can therefore compare them to each other.  Once you've compiled as comprehensive list of companies as possible, it's time to create your spreadsheet table for analysis.

2 - Create a spreadsheet.

Create a spreadsheet to organize your competitive stock analysis.  List the comparable companies down the left side of the spreadsheet and the ratios and values you are computing along the top / columns.  Suggested columns include Company Name, Ticker, Price, Fully Diluted Shares, Market Cap, Total Debt, Enterprise Value, LTM Sales, LTM EBITDA, LTM Net Income, LTM EPS, This Year Calendar EPS (estimated), Next Year Calendar EPS (estimated), 3 - 5 Yr Growth Rate (estimated), LTM P/E, This Year P/E, Next Year P/E, PEG Ratio, Price / Sales, EV / Sales, EV / EBITDA ratio and anything else you see fit to add.  For examples of how each value is included, refer to the stock valuation section.  If you'd like to use our Excel spreadsheet template, please click here to download.

3 - Gather the data.

Now it's time to fill the spreadsheet in by gathering all of the financial data for each of the comparable companies.  You can find the information from several sources, but if you want to do the most accurate job, then you should look for numbers directly from the companies and then adjust them yourself if necessary.  At first it will seem a little confusing, but once you've looked at a few dozen companies you'll begin to understand more and more about what their numbers and ratios mean.  To start, go to each company's website and look for their investor section.  They usually have quarterly and annual financial statements, as well as press releases, recorded conference calls and webcasts, and sometimes they'll even have product updates and more.  Read as much information as you can.  If you can't find much historical information on the company's website, visit any finance site for more info (I like Yahoo Finance for information and for charting).  Begin filling in the columns of your spreadsheet with the information you are gathering.  To get the estimated fields (like future EPS and EPS growth) you'll have to create estimates by doing your own stock research.  When you've finished doing that, you'll be ready to compute the ratios.

4 - Compute the ratios.

Computing the stock valuation ratios can be tricky, so make sure that you double check each figure to see that it makes sense.  The example comparable stock analysis spreadsheet we've compiled has many of the ratios computed for you.

5 - Look for Outliers and Adjust the Ratios.

Now look closely at all of the stock valuation ratios you've computed. Do any of them stand out? You should look for any outliers and then try to adjust them so that they are comparable to the other companies. When you find a number that doesn't make sense or seems too high or low there is always a reason behind it.  It could be that earnings are negative, that the company's asset structure is different, or that the figures you're using to compute it are wrong.  Even if you can't adjust or correct the valuation ratios it is just as important to understand why they are different.  Now that your spreadsheet is complete, it's time to compare the companies' stock valuations.

6 - Compare the Companies.

Look at each stock valuation ratio and compare it to the other companies.  Then, look at all of the ratios for each company and compare all of them to the other companies.  Study the differences and valuations long and hard.  Go away and then come back to them in a few days when you have fresh eyes.  Begin to form an opinion as to which company offers the best value and growth prospects.  Begin to think about whether the company you are investigating is worth buying, or if you should perhaps wait until its valuation becomes more attractive.

7 - Account for Differences.

Explain each difference between the companies to yourself. If one company has higher growth, then it likely has a higher valuation.  Use the PEG ratio to determine which company's growth is price more attractively.  Look at the company's overall market cap to determine it's liquidity and size.  Larger companies are often priced at a premium because of the strong historical growth record and stability, while smaller companies often get a premium because they can grow faster than large companies.  Companies that are barely profitable or going through the early stages of restructuring often have depressed earnings and therefore their P/Es sometimes look astronomically high.  In summary, each ratio is high or low for some reason.  Find that reason and you will learn one more thing about the company you wish to value.

8 - Decision.

The final step is to make your decision as to whether or not the stock you valued is worth buying.  To do that, you'll want to take this competitive stock valuation into account, but you'll also want to do your own investment research and make sure that the stock fits your investment philosophy, strategy and style. Once you've read the other sections of this website, you should be able to make your decision.  If you are still unsatisfied and feel like you need to do more, there are tons of investment books and magazines that will help you make decisions and find new investments.


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