Deck 16: Industry Analysis

Question 1

In the top-down approach to fundamental analysis, industry analysis should:

A) precede economic/market analysis.
B) come after economic/market analysis but before company analysis.
C) come after company analysis.
D) In the top-down approach the order of analysis does not matter.

Answer 1

come after economic/market analysis but before company analysis.

Question 2

Which of the following statements regarding industry performance is true?

A) The performance of an industry cannot be accurately predicted based on the basis of past performance.
B) The performance of an industry is often a constant percentage of overall market performance.
C) The performance of an industry tends to explain 50% of an individual company's performance.
D) Investors should ignore industries with poor recent performance and buy companies with recent exceptional performance.

Answer 2

The performance of an industry cannot be accurately predicted based on the basis of past performance.

Question 3

One well-known and widely used system that classifies industries is the:

A) Commercial Industrial Classification (CIC) system.
B) National Industrial Classification (NIC) system.
C) Standard Industrial Classification (SIC) system.
D) Canadian Industrial Classification (CaIC) system.

Answer 3

Standard Industrial Classification (SIC) system.

Question 4

Which life cycle stage generally sees moderate growth, sales increasing at a decreasing, standardization of products, a large number of competitors and relatively stable costs?

A) pioneering stage
B) expansion stage
C) stabilization stage
D) declining stage

Question 5

The stage in the industry life cycle that attracts many new firms but when weaker firms typically fail is in the:

A) pioneering stage.
B) expansion stage.
C) stabilization stage.
D) maturity stage.

Question 6

The stage in the industry life cycle when companies are able to attract considerable investment capital since these firms have demonstrated their potential and lowered their risk usually occurs during the:

A) pioneering stage.
B) expansion stage.
C) stabilization stage.
D) declining stage.

Question 7

Which of the following is not a limitation of the life cycle approach to security analysis?

A) It helps investors to assess the growth potential of different companies in an industry.
B) It is intended as a generalization and is not specific to every situation.
C) Not all companies fit into neat categories.
D) It focuses on sales as opposed to stock prices.

Question 8

The Standard Industrial Classification (SIC) System is a widely used system designed to classify firms on the basis of:

A) what they earn.
B) what they produce.
C) their capital structure.
D) their net profit margin.

Question 9

At what stage in the industrial life cycle is venture capital financing likely to be first used?

A) pioneering stage
B) expansion stage
C) stabilization stage
D) declining stage

Question 10

Gold mining is a good example of a:

A) growth industry.
B) defensive industry.
C) cyclical industry.
D) countercyclical industry.

Question 11

During a period of economic recovery driven by an increase in business spending, investors would be least likely to invest in what industry?

A) transportation
B) energy
C) capital goods
D) gold mining

Question 12

The most basic industry rotation strategy involves shifting back and forth between what two industries?

A) bank and consumer industries
B) consumer and durable goods industries
C) cyclical and defensive industries
D) energy and capital goods industries

Question 13

If an industry is ranked number one, based on price performance such as outperforming the S&P/TSX Composite Index, an investor:

A) cannot necessarily expect that same industry to be ranked number one again next year.
B) can usually depend on an industry to maintain its top ranking for five years or more.
C) can expect that industry to do well over the next 10 to 20 years.
D) can expect that industry to drop out of the top ten within five years.

Question 14

Which of the following is not one of the five basic competitive factors in Michael Porter's model?

A) Threat of new entrants
B) Bargaining power of rivals
C) Threat of substitute products or services
D) Bargaining power of labour unions

Question 15

Regarding the qualitative aspects of industry analysis, the bailout of the automotive industry would be considered a:

A) structural change.
B) government effect.
C) competitive effect.
D) cyclical effect.

Question 16

Which of the following is not considered an interest-rate sensitive industry?

A) gas/electrical utilities
B) insurance
C) financial management
D) household goods

Question 17

Conducting industry analysis always results in finding industries that will perform well in the short run.

Question 18

Companies readily fit into an industry classification scheme due to the increased information that is available in the marketplace.

Question 19

The larger the number of digits under the SIC system, the more specific the industry breakdown.

Question 20

In the maturity stage, products become more standardized.

Question 21

One limitation of the life cycle approach is that not all companies readily fall into a specific category.

Question 22

Durable goods are an example of a cyclical industry.

Question 23

A source of industry classifications and rankings is The Value Line Investment Survey.

Question 24

The pioneering stage offers the greatest risk for investors but often attracts venture capital.

Question 25

Industry classifications under the SIC scheme are based on what an industry produces.

Question 26

Countercyclical and defensive are different terms describing the same behaviour in the market.

Question 27

The S&P/TSX Composite Index classifies stocks into more than 15 industry groups and 50 subgroups.

Question 28

In which stage of the industry life cycle is it most difficult for the analyst to assess industry prospects and identify the leading companies?

Question 29

Do industries necessarily go into a declining stage or can the stabilization stage of the life cycle be extended indefinitely? What can individual companies do to prevent the company from entering a declining stage?