learned to model, now what
Hey,
so, i already know how to model and perform valuation. But how do i actually come up with a BUY or SELL recommendation. The valuation techniques on wallstreet are heavily based on the assumptions you use. So where can i read up on how to estimate reasonable assumptions.
Is the client worth a lot of money to your firm? If yes, they are a buy.
Hahah. Yeah you play by bankers' rules.
Closer to a real answer: Do we think they will make our clients money over the short term compared to the rest of the coverage universe by delivering on thier promises? Analysts love to be right as it build relationships/brings in trading commissions/gets them ranked. Also, the MD/VP level employees at my bank are also shareholders (you can do the math on this 1).
Honestly, we only care about the next quarter as you'll get more guidence from management on where the numbers will come in as time goes on. Its in both sides interests that they communicate well because missing sell-side estimates isn't a best practice.
Ummm, find an agent and see if you can land a gig at the Gap?
In all seriousness, what you start doing is start estimating your possible error on the valuations. A lot of this is going to come down to conditioning- balance sheets with less debt and more cash on them are going to reduce your possible error. Then see how far away the price is from your estimate. If it's way above or below your price even after factoring in your margin for error, you know you've got your buys and sells. The less tangible, liquid, and fungible the assets, the harder it gets- and now you multiply by the firm's leverage. IMHO this makes banks, growth tech, and retail very tough to put prices on while oil companies, timber, office/housing REITs, and utilities are a little easier to price. (At this point some research guy who covers financials is going to jump out of the woodwork and claim that fixed income products are a lot easier to price than a refinery, but the margin for error on a firm with 10:1 leverage is a lot narrower than an oil company that funds 40-50% of its balance sheet with equity.)
Obviously this is where research becomes more of an art than a science and I say this stuff as just a friendly quant who occasionally gets to help advise on strategies for institutional clients rather than a research guy who does this day in and day out.
OP doesn't realize that research is the marketing department of S&T yet.
Ok, so what if we're on the BUY-SIDE. No more sell side politics and BS.
Also, on putting BUY on clients. I talked to a CEO who said one time analysts put a SELL on her stock so their buyside clients could buy the stock for cheap...
Highly illegal and I doubt there is any merit to it. The CEO is probably just bitter. Our companies' management teams get all mad and pissy about Sell and Hold ratings.
From what I see there are two conflicts of interest...S&T doesn't like Hold ratings (does not really create any additional flow) and banking/ECM does not like Sell/Hold ratings (better for future offerings when it's a Buy rated company). This is just my observation.
On the buy-side the trick is often just finding the land-mines that aren't obvious from the balance sheet and an overview of the firm's assets. But you won't have to worry about that for a while if you're still in college.
For those of us who aren't as sophisticated.
1.) Come up with your valuation- it's a dollar amount per share or for all shares outstanding. 2.) Figure out your margin for error. My general rule is 20-30% on assets per share, so it's higher for more leveraged firms. 3.) If, even with your margin for error, your price is well above the stock price, that stock is a buy using your valuation method. 4.) If, even with your margin for error, your price is well below the stock price, that stock is a sell. 5.) Ideally you want to have a thesis for why the market is pricing the stock different than you and why it's wrong. This is often the scariest part of committing to a trade and it tends to be where you can figure out how tough your guts are.
for starters read an equity research report.
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