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How To Improve Your Fundamental Trades

Real Money’s Chris Versace asks, what do Amazon, Disney, AT&T, Oracle and BlackBerry have in common? It’s not what you think.
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Here’s the big reveal from Real Money’s Chris Versace: Tailwinds can drive alpha. Moldy traditions don’t.

In a recent column, Versace argues that investors are poorly served by S&P’s Global Industry Classification System. This set of 11 sectors attempts to sweep companies into similarly-situated categories, but the truth is that it just doesn’t work. At least not for traders who are trying to understand the market.

Read more from Versace: Sector-based investing, he writes, simply has too many pitfalls.

For example,  (AMZN)  is classified as a Consumer Discretionary company even though much of its profit and earnings power is generated from Amazon Web Services. Walt Disney Co.  (DIS)  falls into the Communications Services sector, which also includes AT&T  (T)  and Verizon  (VZ) , even though pre-pandemic Disney’s Parks, Experiences and Consumer Products segment generated a significant slice of its operating profits. 

Cybersecurity companies such as Fortinet  (FTNT)  and BlackBerry  (BB)  land in Information Technology, a sector that also contains IBM  (IBM) , Accenture  (ACN)  and Oracle  (ORCL) .

He adds: “I would argue these 11 catch-all categories don’t properly reflect the respective business drivers of the companies I just rattled off nor do they do the same for dozens of others. If you’re suspecting that I think sector investing is outdated and outmoded, you would be spot on. Spot. On.”

Instead, Versace recommends that investors need to start trading for the social themes that industry sectors are supposed to capture. As you build your portfolio, categorize industries around “based on the changing landscapes of economics, demographics, technology and psychographics as well as from time to time regulatory mandates.”

Understanding what these companies do and what drives their consumers will help you understand the headwinds and tailwinds around each company’s behavior.

Investing around social themes will help you build a more coherent portfolio. You’ll start to understand what drives a company’s success, and how to find other companies that are poised to capitalize on those same factors.

It’s a lot better than investing around the idea that Disney is in the same line of work as AT&T.