Thoughts on “desirable” sectors?

To summarize what I’ve learned on the sell-side about sectors, all of the most sensible/desirable sectors for a long-term career include three essential aspects: (1) investor interest, (2) high barrier to entry, and (3) stable coverage universe.

1. Investor interest. Simply put, it is most important to be in a sector where capital will continue to flow. Sectors that feature healthy average trading volume and sizable market capitalization will consistently attract the most investor interest. The more investor interest, the more the demand for research. Although tech and healthcare might carry some of the largest market caps, you don’t necessarily need to be in either to fit the criteria of “favorable investor interest” — virtually all coverage groups at your firm are likely sufficient to join considering that if there wasn’t enough investor interest, they wouldn’t exist in the first place. This advice gravitates more to the word of avoiding any sectors that seem to be extremely niche and don’t have seats at other firms. Any sectors that have universally unfavorable long-term headwinds like Maritime Shipping, Paper & Packaging, Oil & Gas (maybe), or Whips & Buggies would be good ones to pass over.

2. High Barrier to Entry. On the sell-side (and usually on the buyside) you make a living by differentiation. Your job is to use your expertise to discover insights that other people would be unable to replicate. Therefore, the easier you can differentiate yourself and leverage your expertise, the better your career you’ll have. For this reason, sectors that require a substantial knowledge base offer the best long-term path. Sectors like Biotech, Insurance, Utilities, Life Sciences, Energy, and FIG all require a higher barrier to entry of knowledge compared to Consumer & Retail or Large-Cap Tech. That is, it is very easy for a generalist to understand the business models and strategies of consumer-facing firms (for obvious reasons). Therefore your expertise in Softline Brick & Mortar Retail is less valuable than if you could walk a client through all of the regulatory nuances of the Power & Renewables sector and how it impacts their focus on inorganic M&A growth or knowing the competitive landscape of the insurance sector.

— personally, I would avoid biotech/speciality pharma if you don’t come from a bio/medical school/phd background because you will never have an edge compared to most other market participants in this space. It will be very difficult to progress to a senior level or gain any traction because you will literally be competing with former doctors at the MD/PM level. Just take a look at some of the biotech firm’s covering analysts.

3. Stable Coverage Universe. Ideally, it would be preferable to be in a sector that has an even playing field where generally all firms in your coverage have favorable business environments — in other words, it’s good to avoid sectors with massive top-heavy consolidation. For instance, the semiconductor and airlines sectors are good examples of industries where a few major players at the top dominate the entire landscape. When this happens, you will see an oversaturation of analysts covering the top firms (like 30+ coverage analysts), making it harder to add differentiation or any new perspectives. Additionally, the rest of your coverage might have a lot fewer names but again, these companies have limited market share and ways of growing because of the oligopoly at the top.

— additionally, I personally would be hesitant to join any new trending sectors like fintech. Although there may be more of an appeal working in a rapid growth sector, don’t be fooled that most companies are currently unproven. There is a very real possibility that the top few will dominate the entire sector due to scale, leaving the rest of your coverage to die.

If you follow this way of thought, it should help you better focus on categorizing each sector by its pro’s and con’s. Ultimately, there’s value to be added in almost all coverage groups in same extent. Your most desired sector will undoubtedly vary from someone else’s, given you might have different strengths and interests.