Comparable Sector Analysis is the study of the economic and fundamental prospects of a particular sector of an economy. It provides an insight into the various fundamental aspects of that sector. This analysis gives knowledge about the current trend and demand for the products/ services in that sector. In addition, sector analysis helps forecast the companies, which will be in an expansionary phase in the future.
Comparable Sector Analysis forms many investors’ strategies before picking stocks and companies they would invest in. Many investors find profitable investment opportunities by performing sector analysis. It gives investors an idea about the economic returns they can expect after investing in the companies of a particular sector. Sector analysis provides an investor with a judgment about how good companies in the sector are expected to perform.
Comparable Sector Analysis compares the returns provided by various sectors over a period of time. This comparison is facilitated through various financial indicators like historical returns, dividend yield, and other valuation metrics. In addition, this comparative analysis aims to forecast returns provided by a company in a particular sector and calculate the opportunity cost of investing. Opportunity Cost is the return provided by an investment opportunity in which the investor has not invested.
Comparable Sector Analysis Using MarketXLS (Excel Template)
Find the template here: https://marketxls.com/template/comparable-sector-analysis/
MarketXLS provides ready-to-use templates for accessible collection and representation of stock market data. This facilitates the investors and traders in making quick and apt investment decisions. It makes use of essential information available in financial statements. Since MarketXLS provides all the required fundamentals information for stocks, we can do a comparable sector analysis in Excel using data fetched by the software.
Let’s finally take a look at how we can analyze sectors using this template provided by MarketXLS.
- Isolate the sector you are interested in and begin analyzing the strongest and weakest stocks in that sector.
- Once you identify the closest trading stocks, analyze them side by side to comprehend which stock is the strongest out of the two. It has been observed that individual stocks behave similarly in which the other stocks of the same sector are behaving.
For example, in the covid period, investors are bullish on pharma stocks even though all the stocks aren’t fundamentally strong. In addition, many pharma stocks are currently trading at their all-time high. Hence, the time period and the sector play a massive role in determining the market sentiment.
Using MarketXLS functions, the investor can assess how the various sectors perform on various financial indicators like dividend yield, price-to-earnings ratio and return on equity, and past returns.
Ranks have been provided based on these above parameters so that the investor can choose the top 2 or top 3, as per their choice. The one with the minimum value in the total of the ranks column is the best performing sector.
Breaking down the template
This is the first part of the Active Template sheet:
- It contains a table showing various values like dividend yield, return on equity, P/E ratio, and historical stock returns – stock return seven days, stock return 30 days, and stock return one year.
- The user can enter any sector code of his choice under the ‘Sector Code’ column heading.
- The software will automatically pull all the values related to that sector, using which our analysis can be performed.
- This table also shows the average, minimum and maximum values of all the metrics used in our analysis. This facilitates easy comparison of a particular sector with the average of all the sectors.
This is the second part of the Active Template sheet:
- This table provides ranks to the sectors based on their metrics.
- The lower the total rank of the sector, the better it has performed on these above indicators. Hence, a lower rank is a good indication. For example, the SPDR Energy Select sector’s stock return in the past 30 days is 25.47%, which is the highest and the lowest rank, i.e., the first rank is allotted to it.
- Now, in this column, ranks will be allotted in the decreasing order of the returns provided. Higher the returns lower the rank given and vice versa. An extra column has been added, which returns a ‘Yes’ in front of the lowest rank sector.
- The investors can choose the top 2 or the top 3 as per their choice.
Advantages of Comparable Sector Analysis
- It gives a deep insight into a particular sector
- Helps in forecasting the returns provided by investing in a particular sector
- Facilitates comparison of different sectors
- Helps in assessing the prospects of the companies in a particular sector
- Aids in eliminating sectors from the investors’ watch list, which do not have reasonable prospects
Disadvantages of Comparable Sector Analysis
- Comparable Sector Analysis might not always be correct. If any uncertain economic or political circumstances occur, a particular sector’s forecasted demand might not hold. For example, before the coronavirus pandemic, the consumer discretionary sector, and particularly the tourism, travel, and hospitality industries peaked. However, after the virus outbreak, the world stood still, and these industries were amongst the most affected ones, dragging down the enter discretionary sector with them.
- While analyzing a sector, seasonal factors should be considered, as they are essential for forecasting future demand and supply of a sector. If these aren’t considered, an error might occur in the analysis, and the report wouldn’t represent the sector’s true nature.
- Analyzing a sector and comparing it with other sectors is a lengthy and tedious process, consuming time and energy.
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