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When buying shares, be interested in the industry in which the company operates

The branch or industry in which the joint-stock company whose shares you want to buy operates operates is especially important for dividend investors.

Industry analysis is also necessary to determine the success of companies in various stages of the economic cycle.

Each field and sub-field has completely different parameters. These parameters determine the future performance of the companies that operate in them. For example, the spring first issue of shares of the American company LinkedIn was so attractive to many investors that they did not take into account the P / E indicator, which indicates the value of the share to dividend income. The P / E ratio, which is around 20 on average in the technology industry, was an incredible 558 on LinkedIn. In order for the investor to return the original share price only on dividend payments, he will have to wait 558 years. The P / E value changes over time and is recalculated each time a joint stock company pays a dividend.

Field analysis

As we have shown in the example above, field analysis depends on field comparison. Furthermore, the market structure of the industry, but also the ways of state regulation and the sensitivity of the industry to the economic cycle. Many investors became aware of the last point only after the outbreak of the last global economic recession, which began in the fall of 2008 with the collapse of the American bank Lehman Brothers.

Even in bad economic times, there may be companies that are doing well. There are fewer of them than companies that thrive in times of economic boom. The company’s business and the field in which it operates is so important in terms of the industry’s sensitivity to the economic cycle.

What is the business cycle?

The economic cycle consists of four phases. The first phase is economic growth and development, which is technically called expansion or boom. The second phase of the economic cycle is the peak at which the economy is at its best and growth is slowing at the same time. Industrial production slows down its expansion until it stops completely. Respectively, companies continue to produce, but without further growth. The market reacts to this by saturating itself and gradually starting to decline in demand, which is reflected in declining production. At this stage, many manufacturers and sellers of services and goods can go bankrupt. This is followed by a recession that can escalate into depression. We classify both concepts in the third phase. The fourth last phase is the crisis. During the last two phases, the market will be cleaned up, which will eliminate inefficient companies. Once such a healing occurs, a new economic cycle begins.

Sectors by business cycle

The operation of companies thus differs according to the fields in which they do business. In addition, these domains are analyzed for cyclical, neutral and countercyclical industries.

Cyclical industries

The group of cyclical industries includes those industries that achieve the best economic results in a period of expansion and boom. This includes, for example, construction, engineering, electrical engineering or transport and others. The consumer can postpone his purchase, which is reflected in the deteriorating economic performance of these sectors, especially in times of recession. Firms whose activities are linked to the cyclical industry are the most in the economy.

Industry neutral

Business cycle neutral sectors and sub-sectors are those where the consumer cannot postpone the purchase for too long. These include, for example, tobacco companies, alcohol producers, but also the pharmaceutical and food industries.

Countercyclical industries

The last group are the so-called anticyclic industries, which live their own lives without being significantly affected by the individual phases of the economic cycle. This category includes rather partial products and services, without which people cannot be in the long run. These include basic foods such as bread, butter, tea, coffee, sugar, flour, but also hygiene items in the form of soap, hair shampoos or toilet paper. For men, they are also shaving products, for women it is also necessary to manage their days.

Such goods are often referred to as emergency goods. In English-speaking countries, it is the term Giffen’s goods.