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Trading the Industry Fundamentals

Earnings and revenues only tell half the story. Knowing the yardstick by which your stock measures up to its competition is the other half. What matters to one industry might be meaningless to another. Each sector is governed by its own rules of trading. The guys are breaking down the sectors so you know what to look for in each.

Trading Retail Stocks
Jeff always starts with same store sales, which are released every month. They give a good indication of how retailers are doing in their stores that have opened for over a year. It’s one way to tell if their business continues to grow. It’s great shorthand for business momentum in the retail sector across the board, he says.

Jeff also advises investors to keep an eye on the number of stores. Saturation can be a problem in retail – Gap (GPS) being a perfect example of a retailer that just ran out of places to grow.

Sector Trade

Trading Tech Stocks
Tim says to always look at the profitability side of an earnings release. The average selling price, or ASP, shows what prices companies like Micron (MU) and Motorola (MOT) are selling their chips and phones for, respectively. The ASP moves with a company’s product line. When new products come out, the ASP drops dramatically a year later (cell phones exemplify this perfectly). If inventory is up and the price is down, tech companies have a huge problem on their hands, Tim says, which is why they are cyclical stocks to begin with. Market share is another valuable metric when it comes to tech, he says.

Trading Commodity Stocks
The usual fundamentals apply with energy, Eric says, but any time you’re dealing in commodities, you must be up to speed on geopolitics and weather. Sometimes one weather event is great for one commodity, but horrible for another. Dry weather can be bullish for corn prices, but bearish for heating stocks, for instance.

Trading Industrial Stocks
Here, it’s all about understanding the supply chain, Guy says. One day the airlines will be profitable and they will start buying new fleets. Obviously, that’s great for Boeing (BA). But look a little deeper, he says. Companies like Rockwell Collins (COL) that make in-flight electronics and aviation systems will get a pop too. Look at the trend, then go upstream with that trend to the associated name.

Trading Financial Stocks
The financials is a sector that has many sub-divisions that don’t always abide by the same rules. For instance, if you’re evaluating insurance companies you need to go against the grain and realize that hurricanes aren’t always bad for their bottom lines, Dylan says. Active storm seasons actually allow insurance companies to raise their rates. It’s also crucial to know an insurance company’s premium loss ratio. You only want to own insurance companies that are making more money than they are paying out, Dylan says. For banks, the important metric is the net interest margins. Is a bank paying more in interest than it’s collecting? You can gain insight into the brokers, which can be the hardest to evaluate, by looking at who doing the most underwriting, who is doing the most advising for M&A transactions, and who is brining the most debt to the market. Dylan says these indicators will shed some light on which broker is doing the best.

Trading the Industry Fundamentals

Questions? Comments?

Trader disclosure:
On APR 6, 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders:
Bolling Owns (DIS), Gold, Silver
Strazzini Owns (VZ), (YHOO)