Investors assess the value of companies and compare their results to the stock price, as a means of determining if that stock is a good investment relative to the industry sector and the market as a whole. Generally this is accomplished through analysis of the company’s financial statements and corporate fundamentals.

However, there are some less concrete factors that traders should be aware of, to prevent being caught on the wrong side of a market move should one such factor change. These so-called qualitative factors include:

•    internal catalysts;
•    the company’s “moat”; and
•    percentage of management ownership.

An internal catalyst is a change in the company’s fundamentals, which may or may not be related to changes in the industry sector. Such internal catalysts within the company may include:
•    hot new products or suddenly defective old ones;
•    an outstanding management team hired or fired; or
•    a 10% or greater earnings surprise or disappointment.

Internal catalysts that are relevant to the industry sector are merely wider applications of the above. Consider the effect on Barnes & Noble (with the Nook e-reader) and Amazon (with the Kindle) following the introduction of Apple’s iPad. The introduction of a hot new product or the assembly of an outstanding management team by the competitor will often ripple through the industry, causing stock prices to rise and fall.

The concept of a company’s “moat” is one favoured by Warren Buffett, and it’s the buffer zone established by a company’s competitiveness through such factors as brand loyalty or a technological advantage.

Consider a pharmaceutical company with a long-term patent on a drug to treat cancer, and compare that to a company that manufactures generic painkillers such as aspirin. The former has a wide and strong moat, difficult to breach by competitors seeking market share, and the latter has no moat at all.

A wide company moat protects stock valuations and raises the value of the company. Companies without a moat tend to rank in the lowest valuation tiers of their industry sectors.

Finally, if the management team own 10% or more of the company’s outstanding shares, the company deserves to be valued more highly than its competitors. High management ownership means:
•    the management team is literally and figuratively invested in the company’s future success;
•    the team’s interests coincide with those of their shareholders; and
•    as a result, the company is likely to be better run and more efficient than its competitors, if the team is at all competent.

Be cautious of a company where the management team is dumping their stock, unless it’s being considered as a short-selling opportunity. Many charting services include news flags on their stock charts to mark times when the team buys or sells their shares, so it’s not difficult.

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