How to Make Money in Stocks Summary (C14 and 15): Industry Winners

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A good portion of a stock's move is driven by the industry group it belongs to.

Therefore, the best place to look for leading stocks is in the leading industries.

There are three terms used in this chapter:

Sector: A broad grouping of companies and industries, e.g., leisure and entertainment.

Industry group: A more specific grouping of companies. Each sector usually has several industry groups within it, e.g., media.

Subgroup: Divides the industry group into more precise categories. e.g., radio/TV

Industry group and subgroup names are usually combined and labeled as ‘industry group’, e.g., Media-Radio/TV.

Not all stocks within a sector perform at the same rate, so it is important that you are able to identify the specific industry groups within a sector that are outperforming the others.

The only way to do this is with fine-grained categorization.

That is why Investor’s Business Daily (IBD) has 197 industry groups.

Of those 197 industry groups, focus on only the top 20 groups. This is where you are most likely to find the real winners.

The industry leading today’s bull market will probably not be the same one leading the next bull market.

To identify new leader groups, look for unusual strength in a stock and see if there are more stocks within the group with similar strength.

If you can’t find at least one other stock with similar strength and attractiveness in the industry group, it is better to avoid it.

The market is full of correlations. A very high performing stock will often have a knock-on effect to other stocks within the same industry group.

Likewise, if an important stock in a group starts to tank, there is a good chance the group as a whole will soon follow.

This principle can affect whole industries also. For example, if there is a major development in one industry, related industries can also benefit shortly after. So if you notice a company doing well, also check out their suppliers.

Read the next chapter here.

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