When analyzing a Stock, there are many potential methods. Out of them, SWOT analysis is a well-known method that can provide you insight into the potential of a company.
In this article, we will break down the thought process behind SWOT analysis, and provide you with the knowledge to successfully implement it in your investing
The SWOT analysis evaluates a stock from the following angles
Strengths
Weaknesses
Opportunities
Threats
Looking For Strengths In A Stock
- Whenever you invest in a company, you need to understand its strengths. For a business to become successful, it needs to leverage its strengths to become a market leader. To evaluate a company’s strengths, here is what you need to look for
- Company fundamentals, taking profits margins and other factors into account
- Management, and how the promoters and employees behave
- Brand loyalty and customer service
- The product. Look for patents, marketability, and quality.
- Remember that different companies will have different strengths. For example, a pharma company might have different patents, while an IT company might have a strong customer base.
Looking For Weaknesses In A Stock
- No company is perfect, and it is up to you to identify the company’s weaknesses. These holes and their importance can give you an idea about the future potential of the company. Some weaknesses are worse than others. While smaller problems can be solved in the long run, bigger problems in the infrastructure of the company can cause it to collapse. To evaluate a company’s weaknesses, look for these signs
- Up and coming companies in the same industry
- Poor management
- Investors jumping ship (selling their stake in the company)
- Bad customer reviews
- Not a sustainable product
- Absence of new products or adaptability
- Just like the strengths, weaknesses are also shifting from industry to industry. Pharma companies might not have competition, due to their patents, but IT companies might have many competitors.
Spotting Opportunities In A Stock
- As our world changes daily, it’s clear that new innovations arise as a result of the problems in the world. For example, pollution is being reduced by electric vehicles. As investors, we need to look for companies that are doing something new that could revolutionize the market. Spotting these companies early on allows us to invest in them before they become industry leaders. Many of these companies go on to become multibaggers. Look for these factors
- New products and new ventures
- New collaborations, takeovers or mergers
- Market trends
- When companies release their annual reports, they discuss their future plans. In these reports, you can understand what opportunities a company possesses
Spotting Threats
- Threats might be the most vital aspect of the SWOT analysis. However good a company looks, severe threats might make it a terrible investment. Threats are weaknesses that can be destructive to a company. Some of these threats are
- Extremely high debt, that is not reducing
- Lawsuits and litigation against the company
- Substitute products that are better
- Government restrictions on the company, like high taxes and other issues
- Again, insights into these threats can be found in company reports. Understanding the threats to a company, and weighing their importance is a crucial part of the analysis
In conclusion, SWOT analysis is a helpful method to understand a company and its potential. It may seem cumbersome, but it will pay off in the long run, as companies that you spot early on can generate massive returns
Another websites that has some great articles on SWOT analysis is found here
