Hand Holding
I'm often asked what I do for a living and I never know how to respond properly. The answer is different depending on who is asking. I can't give the same answer to a school teacher as I do to another banker. Usually I just shrug and say I make rich people richer. I try a little harder to explain my job to students or job seekers who are genuinely trying to understand. Even then it's tricky.
The same situation occurs when trying to explain how to properly pitch an investment idea. I rarely see ideas presented correctly but have tired of trying to correct people. Currently two undergraduates at the University of Utah are interning for me. They are about to make their first stock pitches and asked for some direction in that process. Copied below is what I sent them. Now going forward I can tell people who ask how to present an investment idea that the key aspects are online and that if they are smart enough to work on Wall Street they will find it.
_______________________
Here's a summary of the most important parts of an investment idea. They are roughly in the order I think they should be presented, but I'm not picky about that. This template will not produce a full write-up on the idea. It's just a one- to two-page summary of why you think it's worth doing the real work.
Thesis - What should we do and why?
The thesis should be a single sentence containing the action (buy or sell) on the equity and the most important reasons justifying the action. For example: Buy Grupo Mexico due to its deep discount to the sum of its parts, market mispricing of Asarco bankruptcy liability, and upside potential from approval of Ferrosur merger.
Target Price & Trading - What is the upside?
Ideally, you should have a quantitatively derived price you believe the equity will trade to. This should also include the time in which you expect the target to be reached. If there is a particular entry point you recommend (eg after an event has occurred or a certain stock price level reached) include that as well. For example: Conservative sum of the parts analysis produces a €125 target for Umicore in the next six to nine months. Assuming disposal of zinc operations and a re-rating in line with Johnson Matthey, there is another €25/share in value. Stock has chart and valuation support at €95, attributing no value to the zinc business and 20% discount to JMAT on the core operations.
Key Points - Detail the facts that justify your thesis
It's crucial that this section includes FACTS. Think like a scientist -- if someone else is verifying your analysis, could they dispute your facts? If so, you have opinion, conjecture, or analysis rather than fact. Also, if it can't be quantified, it isn't a fact. From your facts you make the points that support your thesis. For example: Hewitt Associates has $400m in cash and has guided for $250-$270m FCF in '06. Through nine months, the run rate was $281m, making guidance look attainable. At $22/share, the ex-cash FCF yield is over 12.5%.
You should have one section (at least a sentence, no more than a paragraph) for each key point in support of your thesis. You can also include a couple of additional sections for non-essential points, but generally four or five points are sufficient.
Catalysts - What will make your thesis work?
You need to identify the factors outside your thesis that will make it work. If the stock is too cheap, what will make the price move higher? If it's a restructuring play, who will do the restructuring and when? Ideas that require a takeover (LBO, merger, controlling stake purchase) to work are rarely worth considering. Quarterly or annual reporting is only a catalyst if you can predict with high certainty what will happen and outline it in advance. (eg No one wants to hear about a cheap stock that will move higher when good results are announced on the quarter. You're either guessing or have inside information. Neither is of any use.) For example: Reduction of production targets by other coal miners will increase market conviction that commodity prices have found a floor. Stabilizing coal prices will support the equity while the other factors are resolved.
Risks - If your thesis is proved incorrect, why will it be so?
Of course there is no way to identify everything that can go wrong with an investment idea. However you must know the weaknesses in your argument. By definition, none of your key points will be incorrect -- those are facts and so aren't open to dispute. The conclusions you drew from the facts may be wrong. Management can do something unanticipated and stupid. Bad men can fly planes into buildings. Those are risks you need to consider and quantify where possible. For example: If following the divestiture of Umicore's zinc operation the shares do not re-rate to the extent forecast, the results would be less positive than predicted. Every 50bps in EV/EBTIDA multiple is worth approximately €6.
Valuation - Provide the numbers that support your idea
Be sure your thesis is supported by valuation. If you're pitching a value idea, it better be cheap. Growth stocks should actually be growing. Be sure you distinguish between absolute and relative valuation. The specific information you include will vary from company to company. Generally you'll want to provide current detail for your idea, key peers, and a sector or group average. Historical valuation information for your idea and the sector is also useful. If you need an example of a valuation table please let me know.
The same situation occurs when trying to explain how to properly pitch an investment idea. I rarely see ideas presented correctly but have tired of trying to correct people. Currently two undergraduates at the University of Utah are interning for me. They are about to make their first stock pitches and asked for some direction in that process. Copied below is what I sent them. Now going forward I can tell people who ask how to present an investment idea that the key aspects are online and that if they are smart enough to work on Wall Street they will find it.
_______________________
Here's a summary of the most important parts of an investment idea. They are roughly in the order I think they should be presented, but I'm not picky about that. This template will not produce a full write-up on the idea. It's just a one- to two-page summary of why you think it's worth doing the real work.
Thesis - What should we do and why?
The thesis should be a single sentence containing the action (buy or sell) on the equity and the most important reasons justifying the action. For example: Buy Grupo Mexico due to its deep discount to the sum of its parts, market mispricing of Asarco bankruptcy liability, and upside potential from approval of Ferrosur merger.
Target Price & Trading - What is the upside?
Ideally, you should have a quantitatively derived price you believe the equity will trade to. This should also include the time in which you expect the target to be reached. If there is a particular entry point you recommend (eg after an event has occurred or a certain stock price level reached) include that as well. For example: Conservative sum of the parts analysis produces a €125 target for Umicore in the next six to nine months. Assuming disposal of zinc operations and a re-rating in line with Johnson Matthey, there is another €25/share in value. Stock has chart and valuation support at €95, attributing no value to the zinc business and 20% discount to JMAT on the core operations.
Key Points - Detail the facts that justify your thesis
It's crucial that this section includes FACTS. Think like a scientist -- if someone else is verifying your analysis, could they dispute your facts? If so, you have opinion, conjecture, or analysis rather than fact. Also, if it can't be quantified, it isn't a fact. From your facts you make the points that support your thesis. For example: Hewitt Associates has $400m in cash and has guided for $250-$270m FCF in '06. Through nine months, the run rate was $281m, making guidance look attainable. At $22/share, the ex-cash FCF yield is over 12.5%.
You should have one section (at least a sentence, no more than a paragraph) for each key point in support of your thesis. You can also include a couple of additional sections for non-essential points, but generally four or five points are sufficient.
Catalysts - What will make your thesis work?
You need to identify the factors outside your thesis that will make it work. If the stock is too cheap, what will make the price move higher? If it's a restructuring play, who will do the restructuring and when? Ideas that require a takeover (LBO, merger, controlling stake purchase) to work are rarely worth considering. Quarterly or annual reporting is only a catalyst if you can predict with high certainty what will happen and outline it in advance. (eg No one wants to hear about a cheap stock that will move higher when good results are announced on the quarter. You're either guessing or have inside information. Neither is of any use.) For example: Reduction of production targets by other coal miners will increase market conviction that commodity prices have found a floor. Stabilizing coal prices will support the equity while the other factors are resolved.
Risks - If your thesis is proved incorrect, why will it be so?
Of course there is no way to identify everything that can go wrong with an investment idea. However you must know the weaknesses in your argument. By definition, none of your key points will be incorrect -- those are facts and so aren't open to dispute. The conclusions you drew from the facts may be wrong. Management can do something unanticipated and stupid. Bad men can fly planes into buildings. Those are risks you need to consider and quantify where possible. For example: If following the divestiture of Umicore's zinc operation the shares do not re-rate to the extent forecast, the results would be less positive than predicted. Every 50bps in EV/EBTIDA multiple is worth approximately €6.
Valuation - Provide the numbers that support your idea
Be sure your thesis is supported by valuation. If you're pitching a value idea, it better be cheap. Growth stocks should actually be growing. Be sure you distinguish between absolute and relative valuation. The specific information you include will vary from company to company. Generally you'll want to provide current detail for your idea, key peers, and a sector or group average. Historical valuation information for your idea and the sector is also useful. If you need an example of a valuation table please let me know.
3 Comments:
No really, what do you do? And speaking of hand holding, yes please.
Wow! That stuff was really, really, boring! I'm so glad I don't have to work at a job like that!
wait until next week when i provide exciting advice on exactly how you CAN work at a job like that.
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