It's not a coincidence that companies within a certain industry tend to rise and fall together. There are many consumer and competitive forces in play that can affect similar companies. These same forces also affect the success of the industry in general.
All industries tend to follow the same patterns over time. Understanding these patterns can give smart investors a much better perspective on their investments. Keep these industry stages in mind before you invest.
1Emerging And High-Growth Industries
Even a single company can start an entire industry. For example, Alexander Bell singlehandedly started the telephone industry. Today, companies that are establishing themselves in emerging markets are risky investments. Many are primarily concerned with raising cash and performing research and development (R&D).
These companies can take years to start actually selling a product and receiving income. In many cases, the marketplace has not yet accepted the products offered by these companies. Companies in emerging markets are not for the faint of heart. There is a significant risk, but the rewards can be spectacular.
2Rapid Growth And Fast-Earning Industries
Rapid growth industries have sales and earnings that are rapidly increasing compared to other industries. These companies should have above-average earnings for a couple of years. The future should also look exceptionally bright for these firms with regard to sales and earnings. Competitive pressure and economies of scale are significant factors in these industries.
The home computer industry is a great example of a rapid growth industry. A great deal of money was spent on R&D, and products were initially very expensive. After some time, competition developed, and the prices dropped dramatically due primarily to the large economies of scale. In the investment world, these companies are referred to as growth stocks. They can be one of the best investments since they can sustain long-term growth in sales and profits.
3Mature And Stable Industries
The growth of these companies tends to mimic the growth of the economy. While cash flow and earnings can still be positive, products become similar across the industry, just as all home computers are similar today. Price competition eventually ensues, and profit margins drop.
Stocks in these mature industries can be quite attractive for a long period. The growth of these companies tends to be stable and predictable. These companies can also handle a poor economy better than one in a growth industry.
4Declining And Outdated Industries
The railroad or photographic film industries are two good examples of declining industries. These companies get into this situation by having products or services with declining demand or products that are replaced by technological advancements. These industries are usually poor investments, but even though the overall future looks bleak, they can have growth at times.
Individual companies within a declining industry can still be good investments. You must be prepared to do a significant amount of research to find these companies. It's really a question of risk versus potential reward. Conservative investors should focus primarily on companies in mature industries. Investors with greater risk tolerance should target growth stocks; only the boldest investors should have a significant portion of their portfolios in emerging industries.
Remember that it's not the company sometimes; it's the industry. Understand the different stages that all successful companies eventually pass through. It could make a big difference in your investment success.