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How To Do Competitive Analysis


INTROA Secondary Intro Message. Wild Right?Comparative AnalysisA Step-by-Step Case of McDonald’sCONCLUSION: Anything Else I Need to Know?



People are jealous. Have you ever asked yourself why? Because we love comparing things.

We compare our vehicle, houses, wardrobes, habits, ourselves, etc. While nothing good comes from comparing yourself to your peers, there is one area where comparisons are extremely beneficial - stocks.

So let me tell you how to analyze a stock in 5 minutes. And if you think this is some sort of trick, I dare you to keep reading.

Let’s dive in.

A Secondary Intro Message. Wild Right?

Comparative analysis has been around since before your birth. Yet, I’m pretty sure most investors don’t do it. Could it be that they’re beyond that? Unlikely.

Are they too smart to use this “basic” method? Probably not. I believe they’re just lazy. Don’t believe me? Truth bomb.

96 percent of Americans will knowingly consume extremely hot food or drink that burns their mouth (Fifth Third Bancorp, 2015).

Let’s not be like the rest. Let’s be smart investors.

Comparative Analysis

For those who love sports. Comparative analysis in stocks is like sizing up your favorite athletes in a race. It's comparing stats, strategies, and forms to pick the top contender.

Just as you assess sprinters for speed, we assess companies for metrics like P/E, P/S, and ROIC to spot the investment frontrunner.

Before we go on, let me ask you this important question. Would you compare Usain Bolt’s stats to Michael Jordan’s? I think not.

In that same logic, you absolutely need to perform a comparative analysis of companies within the same industry.

Now, I bet you’re already curious about how it’s done.

A Step-by-Step Case of McDonald’s

Let’s say you’re thinking of buying McDonald’s stock. As a smart investor, you have decided to perform a comparative analysis first. Why? So you know how $MCD compares to its peers.

Here is my 5-step method.

Gather Financial Data: Collect P/E (Price-to-Earnings), P/S (Price-to-Sales), and ROIC (Return on Invested Capital) metrics for McDonald's, Wendy's, Chipotle Mexican Grill, and Yum Brands from financial websites or databases. I suggest Seeking Alpha.

Calculate Ratios: Compute the P/E ratio (stock price divided by earnings per share), P/S ratio (market capitalization divided by total sales), and ROIC (net operating profit after tax divided by invested capital) for each company. Just three examples. You can do more.

Compare Ratios: Compare these ratios across the companies. Lower P/E and P/S ratios might indicate potentially undervalued stocks. A higher ROIC signifies effective utilization of capital.

Identify Trends and Outliers: Look for patterns or outliers. For instance, if McDonald's has a lower P/E ratio than its competitors, it might be comparatively undervalued. Chipotle's higher P/S ratio might indicate higher sales multiples.

Utilize Tools: Use finance websites or stock analysis platforms like Yahoo Finance, Bloomberg, or Seeking Alpha for quick comparisons and visualization of these metrics through charts or graphs. Some tools even offer comparative analysis features that simplify understanding and comparison.

Here is a simple comparative analysis example of mine, just for reference.

CONCLUSION: Anything Else I Need to Know?

Comparative analysis isn't just about numbers; it's like decoding a story. Beyond P/E, P/S, and ROIC, context is key.

Consider historical data and industry norms—it's like checking chapters in a book. Market conditions matter too, affecting how these ratios look. And don't skip non-financial stuff—brand loyalty, management quality—think of them as characters shaping the plot.

Remember, markets are always changing; it's a story that never ends, requiring ongoing analysis to unravel the plot.

That being said, know that comparative analysis is only the start. We have more ground to cover.

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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.

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