Buying The Right Stock: Avoid Price Competitive Firms

Buying The Right Stock: Avoid Price Competitive Firms

There are many publicly traded companies that are price competitive. The firm try to better its position by lowering price. The aim for the firm is to beat the competitor. This article aims to clarify why price competition is not the best scenario for shareholders. Exceptions will also be stated where this may not apply. Where weak fundamentals may be ignored when purchasing stocks. The opposite of price competition would be a monopolistic firm. A company that is enjoying large profits due to its exceptional selling feature. Consumers don't like any other alternatives when buying the monopoly's products. Therefore the company may raise or lower its price as it wishes. The demand is not disrupted by competitiveness. These high margins between expenses and earnings will be reflected in the earnings per share. Thus shareholders would enjoy a higher share price. When there is price competition however, the firm is forced to lower its price to beat the competition. Since this is the managerial incentive, less revenue is reflected on the income statement. With fixed expenses, we can find this to be detrimental for the earnings per share. Thus competitiveness could lead to a declination in growth. Examples of competitive industries could be firms involving production of lumber or even television sets. The price becomes a large factor in gaining consumer confidence, since there is enough competition. The monopolistic firm will have majority of the market share because of the immense value it has created for its consumers. There is heavy reliance on the company. The selling features of a monopoly blow competitors out of the water. The shares for such companies are reflected in the stock value fundamentals. It is also common for these firms to have high inventory turnover. Meaning, that with monopolistic characteristics, there is also heavy production. The combination of having high profit margins and high inventory turnover is unstoppable. It is important for me to recognize the fact that there are exceptions. There are companies that are taking on heavy debt and capital expense at the present time. Certain companies have low or negative margins because most of the resources are being allocated towards research and development in pioneering technology. Such firms have a vision to be the best. The monopolistic leaders we have today were at one point "trying to make it". Finding such companies could be a gem in your stock portfolio because of the hidden monopolistic capabilities it carries. Supporting such companies as an investor in its early stages could reap rewards through stock value. Trying to find the future monopolies of tomorrow will always be a challenge. The characteristics of such firms are hidden in the ambition and drive of the workforce. Unfortunately, these numbers won't be reflected on the company's statements. Written by Basim Mirza http://www.basim.ca

Sources Used Mary Buffett, David Clark. Buffetology (Audio Book). Scribner. Mary Buffett, David Clark. The New Age of Buffettology (Audio Book). Scribner. Louis Navellier. The Little That Makes You Rich. Wiley. Joel Greenblatt. The Little Book That Beats The Market. Wiley.

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