Enhancing Bake-off Sophistication
One important factor to consider in the many stock bake offs we have done, like the most recent using eleven financial metrics, is whether or not to consider a stock’s industry for comparison purposes. For example, should a tech stock be compared to a utility stock? Just consider the vast difference in ROE between sectors:
Or return on assets:
Is it fair, with such a large gap, that we compare such different kinds of business models against each other?
From the one standpoint, money is money. Who cares if one sector is more profitable? Don’t we ultimately care about the bottom line?
On the other hand, we could be missing valuable outperformers within specific areas that could be, relative to peers, amazing stocks to invest in.
Going forward, we can take a pragmatic approach and consider both sides! We can calculate points for overall performance against the market and points for sector outperformance. After all, why throw away valuable information?