Comparing Stocks Within Sectors 🍎🍎
The most meaningful comparisons are between similar companies. Let's learn how to compare effectively.
Why Compare Within Sectors?
Apples to Apples
Comparing Microsoft to Coca-Cola is meaningless:
- Different business models
- Different growth rates
- Different margin profiles
- Different valuation norms
Comparing Microsoft to Salesforce makes sense:
- Both are software companies
- Similar business models
- Comparable metrics
- Meaningful comparison
The Sports Comparison
Comparing a basketball player's stats to a baseball player's is pointless. Different sports, different metrics.
But comparing two point guards? Now you can evaluate who's better at the same job.
Same with stocks—compare within the same "sport" (sector).
What to Compare
Valuation Metrics
| Metric | Compare To |
|---|---|
| P/E Ratio | Sector median P/E |
| P/S Ratio | Sector median P/S |
| P/B Ratio | Sector median P/B |
| EV/EBITDA | Sector median |
Question: Is this stock cheap or expensive vs. peers?
Quality Metrics
| Metric | Compare To |
|---|---|
| ROE | Sector median ROE |
| Profit Margins | Sector median margins |
| ROA | Sector median ROA |
Question: Is this business better or worse than peers?
Growth Metrics
| Metric | Compare To |
|---|---|
| Revenue Growth | Sector median growth |
| Earnings Growth | Sector median growth |
Question: Is this company growing faster or slower than peers?
Health Metrics
| Metric | Compare To |
|---|---|
| Debt/Equity | Sector median D/E |
| Interest Coverage | Sector median coverage |
Question: Is this company more or less stable than peers?
Key Takeaways
- Compare stocks within the same sector
- Use sector medians as benchmarks
- Look for stocks that outperform peers
- ShareValue.ai scores already do this comparison
The Comparison Process
Step 1: Identify Peers
Find 3-5 companies that:
- Operate in the same industry
- Have similar business models
- Are comparable in size (roughly)
Step 2: Gather Metrics
For each peer, note:
- ShareValue.ai scores
- Key valuation metrics
- Key quality metrics
- Key growth metrics
Step 3: Create Comparison Table
| Metric | Stock A | Stock B | Stock C | Sector Avg |
|---|---|---|---|---|
| Final Score | 72 | 65 | 58 | 55 |
| Valuation | 68 | 70 | 52 | 50 |
| Quality | 78 | 62 | 65 | 55 |
| P/E | 18 | 22 | 25 | 22 |
| ROE | 22% | 15% | 18% | 16% |
Step 4: Analyze
- Which stock scores best overall?
- Which is cheapest (valuation)?
- Which is highest quality?
- What explains the differences?
Example Comparison: Tech Software
Comparing three enterprise software companies:
| Metric | Company A | Company B | Company C |
|---|---|---|---|
| Final Score | 74 | 68 | 55 |
| Valuation Score | 72 | 65 | 48 |
| Quality Score | 78 | 72 | 62 |
| Growth Score | 70 | 68 | 58 |
| P/E Ratio | 28 | 35 | 45 |
| Revenue Growth | 18% | 15% | 12% |
| Gross Margin | 78% | 72% | 68% |
Analysis:
- Company A: Best overall—cheapest, highest quality, fastest growth
- Company B: Solid but more expensive than A
- Company C: Expensive with weaker fundamentals
Verdict: Company A is the clear winner in this comparison.
ShareValue.ai Does This
Our scores already compare stocks within sectors. A Valuation Score of 70 means "cheaper than 70% of sector peers."
But doing your own comparison helps you understand WHY and builds conviction.
When Peers Aren't Perfect
Sometimes exact peers don't exist. In that case:
Expand the Comparison Set
- Include adjacent industries
- Compare to sector average
- Use broader benchmarks
Acknowledge Differences
- Note where comparison breaks down
- Adjust expectations accordingly
- Use judgment
Focus on What's Comparable
- Some metrics transfer better than others
- Valuation ratios usually work
- Business model metrics may not
Comparison Traps
- Comparing across different sectors
- Using only one metric
- Ignoring business model differences
- Assuming the cheapest is always best
Next up: Sector-specific considerations for major industries.