Qualititative analysis entails examining those aspects of a company that are hard to quantify and incorporate into the price of its stock. Nonetheless, these aspects are quite important. If ignored, they can have considerable adverse effects on your investment decisions.

There are two facets involved in analyzing stocks qualitatively. These are as follows:

1. Examining internal factors that affect the company as an individual entity (Company Specific)
2. Examining external factors that affect the company in the context of its place within its industry sector (Industry Specific)

COMPANY-SPECIFIC QUALITATIVE FACTORS

There are a number of internal factors that must be taken into account when analyzing a company qualitatively. These include examining the company’s business model, its competitive advantage, its management, and the corporate governance it has in place.

Business Model

The business model can be summed up by asking the following question: “What exactly does the company do?” In other words, “how does it make its money?”

It involves figuring out and analyzing what products and/or services it offers, in what markets, and the strategy it has in place for serving those markets.

You can acquire a good understanding of a company’s business model by reviewing its Web site and reading the initial sections of its 10-K filing.

Competitive Advantage

The competitive advantage of a company is that quality that differentiates it from its competitors and provides it with the foundations for its long-term success.

To determine the competitive advantage of a company, you can ask the following questions:

• What makes the company unique when compared to its competitors?
• Does this uniqueness give the company a clear advantage in terms of its long-term growth and profitability?
• Are the activities it undertakes clearly tailored to fit with the company’s overall strategy?
• How streamlined, and integrated, and/or synchronized are all the business activities that the company undertakes when compared to other companies?
• How effectively does the company perform its various operations when compared to other companies?

Management

The management that a company has in place is considered in many quarters to be the most important factor to be accounted for when making investment decisions. Without good management in a company, even the best business model will fail.

To find out about the top management of a company, you can start off by reviewing their biographies on the company’s Web site. It might also be a good idea to do a search with one of the search engines such as Google or Yahoo search on the Web to figure out how those managers performed in their previous positions at other companies.

However, this is not enough to give you a critical feel for how good the management of the company really is. You must dig a little bit deeper. To do this you must examine the following sources of information:

Conference Calls

Conference Calls are quarterly calls (meetings) the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) hold with various stock and investment analysts.

They entail the CEO and CFO providing financial information and engaging in a question and answer session with analysts.

Listening to the type and tenor of responses the CEO and/or CFO can provide you with a very good feel for their:
• honesty
• straightforwardness
• confidence in the business model
• grasp of business the company is involved in.

Management Discussion and Analysis (MD&A)

The Management Discussion and Analysis can be located in the initial pages of a company’s annual report. The aim of the MD@A is to provide information on what the management’s outlook is.

In order to get a good idea of the views of management of a company, it is useful to review MD@A for the past five years. This will give you a good idea about how their outlook and proposed strategies in previous years match up with what they have actually implemented.

Stock Ownership

The compensation packages of management in most publicly-owned companies involve the combination of cash, stocks, and options.

If management have a significant part of their wealth tied up in company stock, it is a good indication that they have confidence in the long-term prospects of the company.

It is important to investigate a company more closely if you discover that they have been selling off their stock, while “talking up” the company’s prospects.

It may be that the company still has good prospects, and the management still have confidence in the company. And they just feel the need to cash in their stock options for some personal reasons.

Nonetheless, it is important to review other aspects of a company’s health, just in case.

You can review stock that management have sold or bought by reviewing their company’s filings with the Securities and Exchange Commission (SEC). Some companies also have this information in the investors’ section of their Web sites.

Corporate Governance

Corporate Governance refers to the policies that have been created in a company that lay out:

• the relationships and responsibilities between the management, directors, and stakeholders
• the rules and regulations governing the above-mentioned relationships and responsibilities

The corporate governance policies are explicated in the company charter and bylaws. They are created to ensure that there are sufficient checks and balances in place to minimize the possibility of unethical and/or illegal actions in the company.

To find out what corporate governance policies a company has in place, it is important to ask pertinent questions related to the following areas:

• Transparency – How informative, readable, and understandable are the company’ releases about financial disclosures and operational matters? How timely are these releases?
• Shareholder Rights – How much access do shareholders have to the board of directors of a company to have their concerns addressed? Do shareholders have sufficient ownership voting rights to call meetings with the board? How difficult is it to make changes in management and directors when things are going wrong?
• The Board of Directors – How independent is the board of directors? What is the mix of inside and outside directors? Is it evenly balanced in favor of inside directors or the reverse?

INDUSTRY-SPECIFIC QUALITATIVE FACTORS

There are a number of external factors that must be considered when analyzing a company qualitatively. These include its customer base, market share, industry growth, competitors, and regulation.

Customer Base

It is important to determine whether a company offers its products and/or services to a small number of customers or whether it has a large customer base. If a company has only a few customers it relies on for the majority of its sales, then the loss of one of those customers could pose a great risk to its revenues.

Market Share

Acquiring an understanding of a company’s market share can provide you with a lot of information about a company’s business. If a company has a very large market share, this could mean that it has a competitive barrier that ensures that it continues make good earnings in the future. The economies of scale that a company derives from a large market share can enable it to make a more efficient use of its resources.

Industry Growth

You can make decisions on a company’s potential for growth by examining whether its customer base in the market in which it sells its products and/or services will grow. You can do these by finding answers to the following question: Is there a growing or untapped demand in the market for the products and/or services that the company produces?

Competitors

Examining the number of competitors a company has within its market space can provide you with information regarding its future growth potential and profitability vis-à-vis its competitors.

If a company has numerous competitors and the barriers to entry into the market it operates are low, then it may have difficulties regarding its future potential.

Companies operating in a crowded market space with lots of competitors and low barriers to entry will also find that their earnings and profitability is also limited by their ability to price their products in a cost-effective way.

Regulation

Government regulations that may be in place for some or all of a company’s goods and/or services can have a detrimental effect on a company’s earnings and profitability. This of course depends on the severity and restrictiveness of the regulations. The more severe the regulations, the more detrimental the effects will be.

It is always important to keep an eye out for new regulations or changes to existing regulations that may have an effect on a company’s business operations.

SUMMARY

In sum, when analyzing a company qualitatively, it is important to examine both those internal factors that affect the company as an individual entity, as well those industry-oriented factors in the external environment.

In some cases, some of the company-specific and industry-specific factors overlap. Nonetheless, systematically, reviewing all the factors described will provide you with a very good idea of whether or not to buy a particular stock.

Table of Contents

1. Introduction
2. Fundamental Analysis
3. Qualitative Analysis
4. Value Investing
5. Growth Investing
6. GARP Investing
7. Income Investing
8. CANSLIM
9. Dogs of the Dow
10. Technical Analysis 1
11. Technical Analysis 2
12. Technical Analysis 3
13. Technical Analysis 4
14. Jim Cramer’s Strategies
15. Warren Buffet’s Strategies
16. Intrinsic Value