Sector-Specific Considerations

Each sector has unique characteristics that affect how you should analyze stocks. Let's explore the key considerations.

Technology

Key Metrics to Watch

• Revenue Growth — Tech lives and dies by growth
• Gross Margin — Should be 60%+ for software
• R&D Spending — Investment in future products
• Customer Retention — Especially for SaaS

Unique Considerations

• High valuations are normal (growth premium)
• Profitability may come later for growth companies
• Network effects can create winner-take-all dynamics
• Disruption risk is constant

Red Flags

• Slowing growth without margin improvement
• Customer churn increasing
• Losing market share to competitors
• Excessive stock-based compensation

Healthcare

Key Metrics to Watch

• Pipeline Value — Future drugs in development
• Patent Expiration — When exclusivity ends
• R&D Productivity — Success rate of trials
• Regulatory Approvals — FDA decisions

Unique Considerations

• Binary events (drug approvals) create volatility
• Patent cliffs can devastate earnings
• Regulatory risk is significant
• Aging population is a tailwind

Red Flags

• Key patents expiring without replacement
• Failed clinical trials
• Regulatory warnings
• Pricing pressure from government

Financials

Key Metrics to Watch

• Net Interest Margin — Spread between lending and borrowing
• Return on Equity — Efficiency of capital use
• Non-Performing Loans — Credit quality
• Book Value — P/B ratio is key

Unique Considerations

• Interest rate sensitivity is high
• Leverage is inherent to the business
• Regulatory capital requirements matter
• Credit cycles affect profitability

Red Flags

• Rising non-performing loans
• Declining net interest margin
• Regulatory issues
• Excessive risk-taking

Consumer Discretionary

Key Metrics to Watch

• Same-Store Sales — Organic growth
• Inventory Turnover — Efficiency
• Consumer Confidence — Macro indicator
• E-commerce Growth — Channel shift

Unique Considerations

• Highly sensitive to economic cycles
• Brand strength matters
• E-commerce disruption is ongoing
• Consumer trends shift quickly

Red Flags

• Declining same-store sales
• Rising inventory levels
• Losing market share to online
• Brand relevance declining

Consumer Staples

Key Metrics to Watch

• Organic Growth — Excluding acquisitions
• Pricing Power — Ability to raise prices
• Market Share — Category leadership
• Dividend Growth — Income focus

Unique Considerations

• Defensive sector, stable demand
• Growth is typically slow but steady
• Brand loyalty provides moat
• Dividend yield is important

Red Flags

• Private label gaining share
• Inability to pass through costs
• Declining brand relevance
• Dividend cuts

Energy

Key Metrics to Watch

• Reserve Replacement — Finding new oil/gas
• Production Costs — Break-even price
• Free Cash Flow — After capital spending
• Debt Levels — Leverage in cyclical industry

Unique Considerations

• Commodity price driven
• Highly cyclical
• Capital intensive
• ESG concerns growing

Red Flags

• High break-even costs
• Excessive debt
• Declining reserves
• Poor capital allocation

Utilities

Key Metrics to Watch

• Dividend Yield — Primary return driver
• Payout Ratio — Sustainability of dividend
• Rate Base Growth — Regulated asset growth
• Regulatory Environment — Supportive or hostile

Unique Considerations

• Regulated returns limit upside
• Interest rate sensitive
• Stable but slow growth
• Infrastructure investment needs

Red Flags

• Dividend cuts
• Regulatory disputes
• High debt levels
• Poor rate case outcomes

Quick Reference Table

Next up: Diversification—spreading your risk across sectors.