Swot Analysis

SWOT Analysis: A Practical Guide to Analyzing Companies

What's the biggest mistake investors make? 

Analyzing a company's prospects without paying any attention to the bigger picture. 

With that in mind, here's how to assess the big picture so you can make the right call. 

The Industry Matters

In many respects, your best investments will come from picking the right industries, not the right companies.  Your analysis should always start with a "top-down" approach. After all, a lagging company in a winning industry is bound to fare better than a leading company in a lousy industry.

Have a hunch that retailers focused on teens will fare better in 2011? If your hunch is correct, stocks of companies like Aeropostale (NYSE: ARO) , Abercrombie & Fitch (NYSE: ANF) and Hot Topic (Nasdaq: HOTT) are likely to rise.

If you don't want to rely on a hunch to find the next high-potential industries, the key questions to ask are: Where are we in the economic cycle? And which industries and sectors tend to do well at in this stage of the cycle? 

Defensive industries tend to fare better in a slow economy -- think consumer staples and utilities -- and cyclical businesses like industrials and retailers do better in a risingeconomy. 

Once you've established a favorite sector, it's time to gain some insight as to which company is the best horse to ride, a strategy known as "bottom-up" investing. This is where you really need to develop a feel for how a company operates, how popular its products are, how lean its cost structure is, the relative strength of its balance sheet, etc. 

SWOT Analysis

Some investors like to use a formal framework known as SWOT analysis. SWOT analysis involves analyzing a company's Strengths, Weaknesses, Opportunities and Threats. Factors internal to the company are usually classified as strengths and weaknesses, while external factors are classified as opportunities and threats.  SWOT analysis can be extremely useful when trying to...