Qualitative Analysis - Stocks
Overview of Qualitative Analysis
Qualitative Analysis is the process of examining the health of a company by looking at non-financial information such as the management team, culture of the company, business model, and competitors.
The key to any company is the management team. What is their philosophy? How well do they work together? These types of questions can not be answered from looking at a balance sheet. The logic in researching the management team is that if the management team is strong with good direction, it will at some point in the future be reflected in the stock price. The first step in assessing a management team is to look at their educational background and previous work experience. Like a sports team, it is important to not only assess the management team on an individual basis, but how well they work together. If you are looking at a car company and you see that a third of the management team previous job was in surfing, that should probably raise a red flag.
The corporate culture is just as important as any price to earnings ratio. The corporate culture will provide insight as to the health of a company from the inside out. Think of an experience where you called a company for support and you could not find anyone that could help you with your problem. Then when you were out to dinner with friends, everyone at the table had a similar experience. This is probably a sign that the proper training and or dissemination of information is at a deficit.
Understand the Business Model
Another key to qualitative analysis of a stock is to understand the business model of the company. When looking back at Google, it was a no brainier investment. Google has a business model of providing free content to the world in a the easiest fashion. How can anyone compete with such a bohemian model? The business is first concerned with providing a quality experience to the world, with profits coming in second. This model was unlike anything on the web at the time. Even the basic of qualitative analysis would have shown Google to be a great investment.
If a company is entering into a saturated market and does not have a unique business model, odds are the company will fail or have limited success. This is where qualitative analysis would assist in the effort of analyzing an industry in terms of the top companies and the services they provide. How often have you invested in a good company, yet the stock continues to head lower. For example, there has to be one great bank stock out there, unfortunately due to the current mortgage crisis of 2008, every bank stock is taking a hit.
Qualitative Analysis like any other form of investment analysis is not the end all be all. But when combined with other techniques, it will give clues into the quality and health of a company.