Standard Industrial Classification (SIC)

The Standard Industrial Classification (SIC) is a system of four-digit codes created by the U.S. government to classify businesses by their primary type of economic activity. Think of it as the Dewey Decimal System for the business world. Its goal was to create a standardized way to collect, analyze, and publish statistical data related to the U.S. economy. For decades, investors and analysts relied on these codes to quickly identify a company’s industry, find its key competitors, and perform an industry analysis. For instance, if you were researching a company, its SIC code would instantly tell you if it was in steel manufacturing, retail banking, or software development. While still found in older documents and some databases, the SIC system has largely been replaced by the more modern North American Industry Classification System (NAICS). However, understanding SIC codes is still useful, as they provide historical context and can be a starting point for digging into a company's past performance and competitive landscape.

The beauty of the SIC system lies in its hierarchical structure. Each company is assigned a four-digit code that gets more specific with each digit added from left to right.

• First Two Digits: Identify the major industry group (e.g., Manufacturing, Retail Trade, Services).
• Third Digit: Narrows it down to a more specific industry group.
• Fourth Digit: Pinpoints the exact industry.

Let's take an example. Imagine a company with the SIC code 2834:

1. Division: Manufacturing (Codes 20-39)
2. Major Group 28: Chemicals and Allied Products
3. Industry Group 283: Drugs
4. Industry 2834: Pharmaceutical Preparations

This tells you instantly that the company manufactures pharmaceutical drugs. This simple code allows an investor to quickly group the company with its peers, like Merck & Co. or Pfizer, for comparison.

For a value investing practitioner, understanding a business is paramount. The SIC system, despite its age, was a foundational tool for this process.

• Finding Comparables: The most direct use is identifying a company's true competitors. By looking up companies with the same SIC code, you can build a peer group to perform a relative valuation. Are your company's profit margins higher or lower than the industry average? Is its price-to-earnings ratio out of line with its direct rivals? The SIC code gives you an instant list of companies to ask these questions about.
• Understanding Industry Dynamics: As Warren Buffett often says, it's better to be in a great business than a tough one. SIC codes help you analyze an entire industry's health. You can pull historical data for an entire SIC group to assess its long-term profitability, growth rates, and cyclicality. This helps you understand the “tide” that all the boats (companies) in that industry are floating on. A strong company in a terrible industry is often a riskier bet than an average company in a fantastic industry with a wide economic moat.
• Screening for Opportunities: Investors can use stock screeners to filter for companies based on their SIC code. If you believe, for example, that the railroad industry is undervalued, you can screen for all companies in SIC code 4011 (Railroads, Line-Haul Operating) to generate a list of potential investment ideas for further research.

The biggest drawback of the SIC system is its age. It was last updated in 1987. That’s before the internet reshaped the global economy, before the rise of biotechnology, and before the service economy exploded.

To address these shortcomings, the U.S., Canada, and Mexico jointly developed the North American Industry Classification System (NAICS) in 1997. NAICS is the new gold standard. It:

• Uses a six-digit code, allowing for far more detail and specificity.
• Is updated every five years to keep pace with new and emerging industries.
• Better reflects the modern service and technology-based economy.

For example, an e-commerce company or a social media platform simply doesn't fit neatly into the old SIC structure. NAICS has specific categories for them.

While you will still see SIC codes referenced in filings with the U.S. Securities and Exchange Commission (SEC) and on financial data websites, you should always try to use NAICS codes for your primary analysis. Think of SIC as a helpful piece of historical information, but NAICS is the tool for understanding a company's place in the current economic landscape. When you're trying to find a company's competitors or analyze its industry today, NAICS will give you a much more accurate and relevant picture.