Stock analysis is a data-driven process involving large amounts of data from financial statements, macroeconomic reports, and stock market charts. However, when it comes down to hand-picking the right stock for your portfolio, it is important to understand that valuation metrics alone cannot give the big picture about the long-term growth potential of any company. Taking your stock research further by studying underlying factors affecting a company can help you identify highly-valuable stocks.

Qualitative Valuation of a Company

Qualitative analysis of a stock is a method of understanding intrinsic non-quantifiable attributes of a company that can affect the potential value of a company. The top qualitative factors to pay attention to in evaluating potential stocks include:

• Competitive advantages: Durable competitive advantage in a company's business model is a strong indicator of growth potential as it provides the company with an edge over its competitors. Competitive advantage can come in the form of disruptive technologies and patents, a trusted brand name that provides higher pricing power, extensive geographic reach, and a large distribution network.

• Management: A company’s executives largely determine the success of the company, as they are responsible for making strategic decisions about the business. The most successful companies have highly skilled and experienced people in their management. It is also important to see how the company’s management style ensures employee satisfaction and the quality of their personnel. 

• Industry: Industry trends are a strong indicator of the long-term growth prospects of a company. Some factors that drive favorable growth trends in the industry include emerging technologies, e.g. digital payment technology, cloud technologies, as well as favorable government regulations. You can also predict the performance of a specific industry based on how the larger sector to which it belongs is affected by the various phases of the economic cycle.

Identifying Valuable Companies Beyond Financials

Specific unique contexts about the state of a company can provide further insight into the numbers reflected in a company’s fundamentals, and explain price volume trends for a stock. Here are three scenarios where it is wise to look beyond quantitative indicators in assessing the value of a company’s stock.

Bankruptcies

While bankruptcies happen for various reasons like unfavorable economic conditions or poor management, it is also important to note that companies that emerge from bankruptcy go through restructuring, including changing management and adopting business strategies that might reposition the company for future growth. However, it is most common to see a less-than-premium price and excess supply of shares in the market from companies emerging from bankruptcy. This is not always due to fundamental issues with the company but is usually caused by the majority of previous shareholders being unwilling to hold on to their stock and thus selling them on the secondary market as soon as they are reissued new stocks.  This is why when analyzing the value of a stock from a recently bankrupt company, there is a need to look beyond current market numbers and study the strength of the business. A savvy investor willing to buy shares at their current low price and hold on to them until they grow in value might be able to make a handsome profit.

Initial Public Offerings

Another case for looking beyond financials involves stocks issued by startups and new companies that are just launching public offerings. Many new companies may not be hitting expected profit numbers yet as they could be investing their revenue back into the business while growing tremendously. It is also common for an IPO to deliberately offer shares at a reasonable price to encourage more investors to take a risk on a new company. When evaluating a company in this category, it is important to look deeper and see if the business demonstrates a strong competitive edge or is introducing a disruptive and game-changing product or service. If this is the case, you could be in for a good bargain in picking up shares while they are fairly priced in anticipation of rapid growth and an increase in share value. However, risks are involved and thorough research should be conducted.

Insider ownership

When company insiders hold significant shares in a company, it is often a good sign. And while current prices might not reflect the future value of a stock, it demonstrates confidence in the value of the company for insiders to spend their own money to purchase shares in the open market. These insiders often know more about the business than anyone else and can reflect a positive outlook on the business’s long-term success. When evaluating stocks with these attributes, be sure to differentiate between shares awarded to executives and employees as part of their compensation as opposed to individually bought shares. 

Qualitative Stock Analysis with Anahit

Staying up to date on business news and important social conversations about a company can help you make a detailed appraisal of its products, customer satisfaction levels, management decisions, and ultimately the quality of its stock. Anahit utilizes machine learning to process social conversations and news content every day, updating you on the go about everything you need to know on selected asset classes. And when it’s time to revisit the numbers, you can access real-time statistics, trading charts, and financial trends of various instruments on our dashboards

Start your in-depth stock analysis with Anahit today. Visit Anahit.ai to sign up for a three-month free trial.