How to Select a Stock - Part II- Success Levers

In my previous post I tried to explain how you could understand a business. The next step is to research a company and try to figure out whether its stock can be a good investment bet or not.

I am trying to stay away from giving specific examples, as I don’t want to bias you towards or against any specific stocks. Secondly, specific stocks from a geography may not make sense to readers from another geography. This makes my job a bit tougher as specific examples aid a lot in understanding a concept. But I shall try and make my posts as simple to understand as possible.

First of all, you need to understand what differentiates the company you are researching from its competitors. There are various levers of attracting customers that an organization can use to grow its revenue and profits- brand, research and development, customer service, cost advantage, economy of scale, efficient operations, etc. You need to understand which of these levers a company is using and how successfully.

If the company is using operational efficiency, cost advantage or economy of scale as its lever, it is going to attract customers who are cost conscious. Hence, it will be extremely important for the company to be able to stay at the forefront of operational efficiency by investing in its supply chain management, adopting new processes and keeping its cost of production or service low. You need to ask whether the company will be able to maintain its lead over its competitors by investing in the necessary upgrades or initiatives. This lever gives advantage to a company but requires them to continuously work hard and stay ahead of the competition.

If the company is using customer service and experience as its success lever, you need to understand the company’s capability in maintaining the loyalty of its customers by providing excellent customer experience every time a customer interacts with it. Generally, this lever is very strong and provides a long term advantage to the company as the customers start bonding with the company and don’t leave it until the company gives them strong reasons to defect.

Research and development provides another success lever to companies. Many product companies use this lever to create loyalty amongst customers. These companies focus a lot on creating a culture of innovation within the organization. However, you should be able to ascertain whether the company in question is designing products or conducting research keeping the interests of the customers in mind. Many companies get trapped in new technology development without knowing how they are going to use it. This proves to be fatal for them. Research and Development lever can be used successfully by continuously engaging in customer focused research and product development.

At the end of this analysis, you should be able to answer this question- if a customer has to buy a product or service, which is also offered by the company you are researching, will he buy it from the company? If yes, why? And what will make him coming back?

If your answers to these questions are in the favor of the company you are researching, you have found a potential winner. But this is not the end of your quest for finding a winning stock. There are a few more things you need to do. I will cover them in my coming posts. If you have any queries regarding this post, let me know.