Equity Research Q&A with Flake

Walkerr:

What is your career path? You mentioned you came from a back-middle-office job.... What is the most attractive thing in your job? What do you research?

Thanks for the thread!

My career trajectory changes with new developments. Currently, I'm seeing a few options I can pursue:

1) Stay where I am right now, work towards my CFA designation, and hope that my analyst throws a couple of coverage stocks my way. After that, I can try to make the move to the buy-side, work in the industry, or go to a different sell-side firm as a lead analyst. If my analyst left and I was offered the lead spot at my current bank, I would probably still move to a different firm. Why? I heard that you will always be the "associate" in the eyes of your sales force and clients, basically, the guy who moved up only because someone else left...wouldn't want that.

2) Go to b-school and try something else entirely (i.e. banking).

The most attractive thing about my job? I'll take that as "what do I enjoy the most."

I get a huge kick out of being viewed as helpful to a client or when my analyst is asking me for my opinion on something. My favorite two quotes would be something like: Institutional Sales Guy "My account doubled up on his position after speaking with you yesterday and said you were very helpful. We already made $X from these guys this month" or Senior Analyst: "Do you agree with my assumptions here? Am I understanding this correctly? What do you think we should add here?" Maybe I just need people to pad my ego, but I enjoy the fact that in addition to any grunt work I do (updating models, writing up reports, etc), I get to provide my input, which is also viewed as valuable in certain cases.

What do I research?

Specialty finance companies, which can range from mortgage REITs to business development companies.

Rana Clamitans:

What's a typical day like? To get more specific, what did you do at work last Thursday? What time did you get in and out?

Thanks for doing this.

December is pretty slow for my team. That said, last week was unique, we were busy Monday-Wednesday and then things really slowed down on Thursday and Friday. The things on our plate last week consisted of publishing a 2012 outlook piece and picking up coverage of another company.

In addition to us initiating coverage and publishing an outlook piece, last Thursday was also a big macro/key data day. I'll try to do one of those timelines, with a lot of detail:

6:50AM: I get to my desk (this is actually early for me, I usually come in at 7:30-7:45). My analyst is on the morning sales call today, where he will discuss our outlook and the new coverage name. I quickly check Bloomberg and my industry specific news sources for any big headlines that we should be aware of prior to the morning meeting. I get myself some coffee and run down to the trading floor for the meeting. I would usually sit these out and just dial in.

7:20AM-8:00AM: Morning meeting, I sit through a bunch of other speakers until my analyst gets up to present. A couple of sales guys ask a few questions, my analyst handles himself well and comes off confident.

8:30AM: Initial jobless claims, PPI, and the NY Fed Empire manufacturing index hit the tape. I briefly review the numbers and the street's consensus estimates. Any sub-component of GDP or the unemployment rate is important for my sector (as is for most), but we don't publish anything unless the news is shocking and will cause us to change our estimates or ratings.

8:50AM: Our economist blasts out a note with his thoughts on the data that just came out. I review to make sure nothing stands out, give my analyst a brief rundown of the note.

9:00AM-10:00AM: I check the futures, look at my coverage stocks' off-hour prices, and see that not much is going on. I shoot the shit with the guys around me, discussing holiday travel plans, etc.

10:00AM-11:30AM: My analyst makes/takes a few more calls with various accounts and sales people and discusses the new coverage name as well as the big outlook report, while I rebuild one of our messier models and clean it up.

12:00PM-4:00PM: I get lunch, do "maintenance work" items which include things like updating our industry comp table, writing up a "to-do list" for my offshore associate (we have a guy overseas that does random/mundane crap for us), and I update our 100 page marketing presentation for my analyst's marketing trip in January.

4:00PM-6:00PM: Three of our companies post dividends after market close, two of them are below our estimates and one in-line. I write up three notes, one for each company (not long, 1-2 pages), with our commentary, and any change in our 4Q expectations.

6:00PM-6:30PM: My analyst reviews the notes I wrote up, and submits them for compliance approval.

6:30PM-7:00PM: I wait for compliance/supervisory analysts to approve the notes and release them to the public. Everything goes smoothly and I go home.

This week, with people out on vacation and things moving slowly, I've been coming in around 9:30 and leaving around 4:30, checking my blackberry in case something happens later after market hours.

.

Ovechkin08:

Could you comment on the valuation models used; does anyone use DCF on the sell-side or is it all forecasting next quarters earnings and attaching a PE multiple? In terms of the work you do, what % is modelling and what % is report writing?

Thanks

It varies by sector.

For example, since our companies are financial companies, we use book value multiples to value our stocks and set target prices. This is our primary tool. We also use a dividend model (our stocks pay consistent dividends) as a sanity check, but we do not forecast/discount other cash flows. Book value would be useless for something like Tech or Healthcare.

DCF is commonly used in other sectors but I think it's usually in addition to other valuation tools. I think most groups use a combination of intrinsic and relative methods for their valuation and to create a range of target prices. Also, very little technical analysis.

Can't speak for the other teams, but for me, the % split between time spent on report writing and modelling (excluding everything else) would be about 75/25.

alman:

As I work at the other end of your output, how do you find dealing with the buy-side? Do you ever come away feeling this guy/client know (or doesn't) know his stuff?

Anything you wish you could tell clients that you wouldn't say in a 1 on 1?

There was one incident with an institutional account, where we set up a meeting between two buy-side analysts (from the same fund) and company management (C-level guys). The analysts completely wasted management's time and not only made themselves look bad, but made our sales people (and us) feel like shit for dragging the CEO and CFO out to NYC from Boston.

Aside from that, the institutional guys are usually pretty knowledgeable, given the amount of time they put into the sector. It's been a year and so far I had no big issues with any of our accounts for the most part. There are a few big accounts where the analyst or PM will know so much about our space that we really have to prepare ahead of our calls. Nothing bad to say really...and if there was, it was so minor that I don't even remember it. I don't know about the other guys in ER though, I'm pretty laid back. Honestly though, it's our job and this is what I'm getting paid for. You can bet your ass I will be patient and helpful if you're willing to meet me half way.

Can't say the same for our retail clients that we deal with occasionally (PWM accounts). Also, our sales force can be frustrating at times.

febreeze:

Awesome, here's another:

How much accounting knowledge is used in the way you research a company?

Bumpp

febreeze:

Awesome, here's another:

How much accounting knowledge is used in the way you research a company?

You need be very comfortable with financial statement analysis. Be able to identify weaknesses in the balance sheet and point out changes in the quality of earnings and cash flow (i.e. Sales increased 25% sequentially, but accounts receivable increased 30%, good or bad?). Be able to understand your sector specific metrics and ratios (i.e. leverage decreased one turn, why? What does this mean for next quarter?).

This is in addition to knowing accounting topics that are associated with valuing the company (DCF, multiples, etc.).

febreeze:

Why did you go for equity research on the trading side, instead of say asset management?

1) The potential publicity and recognition you get with being a sell-side analyst is attractive to me (I am a shy attention whore, if there is such a thing). 2) Location. My bank's AM division is located in a different office building, different part of town. It was much easier to meet and network with the sell-siders since I was in the same building as them. 3) Beggars can't be choosers. I would take anything just to get out of my BO role.

obscenity:

Dear Flake,

If one puts in the effort and completes 2 or 3 levels of the CFA, does a reasonable amount of networking, and is willing to back it all up with an MBA if necessary, is a transition to ER from an unrelated field (let's hypothetically say public accounting) feasible? Given a reasonably qualified candidate in that scenario, do you think the MBA would be necessary?

This is a post where I will have to say that I'm not 100% sure and this is a subjective response. But here are my thoughts...

If you want to transition to ER, a CFA alone will not be that helpful, especially if your networking efforts are continuously unsuccessful. There are plenty of CFAs who are stuck in their current roles and are unable to make the move. An MBA, however, will give you a lot more options and will "re-brand" you (as everyone here likes to say).

I would say focus on networking and don't go beyond level 1 with the CFA (anything more than that is overkill in my opinion and will not add much incremental value when trying to break in). While you're networking kick off your b-school application process in case you come out empty. Complete your CFA once you make it into ER in order to advance your career.

Not sure if that's helpful at all.

febreeze:

I'm an accounting major, and economics minor - do you think I'm at a disadvantage compared with finance majors, when it comes to being more prepared for an equity research role?

Also, how much interaction between you and the traders on a daily basis?

And how much time do you spend on the phone with people who work at the company you are researching?

1. I don't think you'll be at a disadvantage if you do econ+accounting instead of finance, unless your school is well known for a strong finance UG program. Then you might miss out on some OCR opportunities and have to deal with interviewers questioning your major selection.

2. Minimal interaction with our traders. The most common interaction I have with our trading desk is when I ask about large swings in our stock prices...things that I can't explain with headlines/macro alone. Usually they will comment with stuff like rotation out of safety, short squeeze, etc. My primary interaction is with our institutional equity sales force.

3. Varies by company. Usually we only deal with them on a quarterly basis, during earnings season when you have follow-up questions after the investor/analyst earnings call. Sometimes they will contact you and say "hey we want to discuss our results today if you have a chance". For most of our companies we have direct access to the CEO and/or CFO, but others want you to deal with Investor Relations first (which usually sucks because they don't know much and usually IR just tells you to wait while they ask someone who's informed). Anyway, I'm rambling at this point, but like I said - it varies by company and also by the type of question you're asking. I wouldn't say we speak to them often but we do have easy access to the companies and usually a very good working relationship.

febreeze:

I'm also wondering, how much training do you get on writing reports?

You said you shadowed them, and they were impressed; but what was the training like afterwards?

We did have a "Business Writing" training module, which was part of the S&T training we attended (I think it was something like 4 weeks total, the Business Writing part was only half a day). However, all of that stuff will be relatively useless in writing research reports for your analyst. Here's why - your analyst will have his/her own style and you will have to mold your own writing rules and style to write like he or she does (given that your name will not even appear on the reports until you obtain your Series 7, 63, 86 and 87). You will learn how to write the reports and adapt while you're on the job.

It's funny because I came across a few essays I had to write in college and I don't recognize them, as if a stranger wrote them.

During my shadowing period, the analyst just threw stuff at me and I did it with no problems. The things were basic, like updating the models when the earnings press release came out, or putting together a few charts/graphs for the report, etc. So I think the "impressing" part was just due to my fit and behavior. I was enthusiastic at all times, didn't ask stupid questions, didn't make dumb mistakes (in fact, I caught a few), and I was just really happy to be there.

golfer23:

Flake,

This is all dead on in my opinion. I took a bit of a different route and am not at a BB, rather am with an independent ER shop. But one of the key things that I think you point out is that the report writing is about 75% of the job -- modeling is important, but creating a cogent piece that is well thought out is critical. Wish this would have been on here a year ago, would have saved me some errors (particularly pitching an apparel stock to a great retail analyst haha).

Enjoy the holidays!

Thanks golfer. Happy holidays to you as well.

Are you still in ER? Any advice for an MBA looking at summer internship recruiting?

AndyLouis:

trying to start gathering votes for 2012 member of the year I see, thanks for the post Flake

I am re-visiting my philosophy and approach to WSO as part of my quarter-life crisis.

Will Hunting:

HOLY SHIT, THE FUCKING APOCALYPSE HAS COME.

P.S. Awesome stuff flake

Don't get used to it.

Unforseen:

Useful information. Did you cold call or cold email the research guys when you were starting your networking?

I cold emailed only. It didn't feel as awkward since it was internally. I tried to hook the analyst with a good question, something that wasn't too obvious. I didn't want the analyst to just say "hey take a look at our note last week, we addressed this topic recently /end thread."

febreeze:

Also, if you can share, what is the process by which you gather all the information for a report, i.e. what are the steps from picking a company to handing the report to your analyst?

febreeze:

How many reports would you say that you work on per week?

Also, if you can share, what is the process by which you gather all the information for a report, i.e. what are the steps from picking a company to handing the report to your analyst?

I have access to a bloomberg terminal through my school, and would like to develop a basic research technique.

The number of reports depends on what's going on that week.

During earnings season (usually 1-1.5 months after quarter end for companies that have FY ending December 31):

• The number of reports is roughly 2x the number of stocks we cover, published in a span of about 2-3 weeks (duration of earnings period). One quick report or email blast that we send out as soon as the earnings release hits the tape (1 page or less). We follow that up with a more in-depth note which we publish after the earnings conference call (3-5 pages). The number of pages and level of detail varies by analyst/sector. My guy doesn't like too much writing.

Off earnings season:

• Varies greatly. We have a bi-weekly recap note. Other than that it depends on what's going on that week. For example, during the same week, we could have 3 dividend announcements (1 page note for each), a macro event that impacts our sector (1-2 pages with our thoughts on that), and an initiation of coverage (can range from 15 to 30 pages for my group). There are weeks where we don't release anything at all.

Gathering of information:

• Going through the company's 10Qs and 10Ks. There is a section that's dedicated to the nature of the company's business and operations. It goes over how they make money, what the current market opportunities are, how they are structured, who their biggest competitors are, what are their biggest risks, etc.

• Contacting other groups within the bank. For example, I was working on initiating a company and needed to show the upcoming debt maturity wall of below investment grade debt over the next 5 years. Unfortunately, I don't have the necessary package in FactSet for the leveraged loan data. I reached out to our leveraged debt capital markets group who sent me the scheduled high yield bond and leveraged loans maturities I needed.

• Usually the Qs and Ks point you in the general direction of key drivers in the industry and so on, but do not provide the detail you want. Using the above example, the company might mention something like "we are well positioned to benefit from the upcoming debt maturity wall." Now I would dig deeper and try to quantify those maturities. I would then go to FactSet/CapIQ/Bloomberg, which was useless in this example but in general they have what I need (I always call the guys at FactSet if I can't find something).

• Calling the company itself. I can call investor relations or the CFO/CEO himself in certain cases and pick their brain.

oracle:

Flake,

Good post man, but can you tell everyone what you did to build your confidence(Knowledge/skill) to approach someone for a shadow opportunity?

My interest in corporate finance peaked during my first semester, senior year. By then I already accepted my return offer for a BO role and realized I was fucked (non-target, awful hiring environment, mediocre GPA, the list goes on...).

I made the most of it by taking as many relevant classes as I could and getting a 3.9 and a 4.0 for both semesters, with the hopes of setting myself up for a transition into IB or ER.

I graduated in May 2009 and had the entire summer off before I had to start in September. I spent the summer learning more about IB/ER. I read a couple of Damodaran books, as well as that McKinsey book. I became a regular reader of WSJ and subscribed to Barron's. I basically learned as much as I could on my own.

Once I started working, I attended a WallStreetPrep class (the actual 3 day course). It was probably a bit of overkill and maybe a waste of money, but it definitely helped to solidify what I read and practiced during the summer.

Prior to sending out my emails to the analysts, I pulled up the most recent 3-5 of their reports and read them thoroughly. I made sure that I read at least one industry focused report, and not just 3-5 notes on individual companies (this helped be grasp the entire sector better).

After all of that, I felt pretty confident with technicals ahead of my informational interviews and I was comfortable enough in discussing their sector.

What I DIDN'T prepare for were the behavioral/fit questions and things of that sort. When I had my 15 minute meeting with one of the heads of research, he pointed to a stack of papers on his desk and said "I have about 100 sheets of ivy league resumes on my desk, what's going to make you stand out?". I chocked, started babbling about how I wanted more responsibility and how ER has been my goal...pathetic, forgettable, and unimpressive.

blastoise:

Do you think fundamentals will always beat probability analysis?

I don't know if this is meant as a joke or not, but I definitely laughed...

blastoise:

Do you think fundamentals will always beat probability analysis?

Always.

febreeze:

awesome.

so, how do you (or the analyst) get from the point of just gathering all of the data to deciding what is important enough to mention in the reports?

Is the initial training specific to your sector, or is it general? Because if it is general, I'd like to know how you decide to filter the bullshit from the data.

this seems like a fairly investigative type of job, so how do you develop that intuition? just experience, or is there some sort of a list you check off? I mean, obviously, every analyst has to decide to a certain point - but I figure there is also some sort of a standard process?

After going through the quarterly and annual filings, speaking to management, speaking to other industry participants, attending industry conferences, and listening to earnings calls, you can quickly identify what the key drivers are and what's important for the company and the sector. Each industry has a set of drivers of growth and demand that each analyst knows to follow and track. If you can get your hands on Series 86 prep materials, it will give you a great introduction and overview of the ER world.

Right now you probably don't have the same access and the time as we do, I would use that Bloomberg terminal and pull up a few research reports. Highlight the metrics and key data they focus on, and try to use that in your own analysis of a different company within that sector.

The initial training is general and not specific to your sector. That's something you learn about when you start.

Honestly, all of that information gathering becomes very straight forward with experience. We don't sit there and come up with new and creative things to "investigate". We just know that something like the unemployment report or housing starts will come out on a certain day and we make sure that we are in the loop when those numbers come out. The data and the information gathering is fairly standard, it's the interpretation of that information that will differentiate you from the pack.

bullbythehorns:

do you feel that the depth of research on the sell side is lacking in some regards? I.E. do alot of sell siders just stamp a "buy" rating on a shit stock to appease buyside clients who hold the stock, and not piss off management of the company they are covering? I guess my question is how much do the politics of sell side ER play into the integrity of your rating? I know it probably differs from analyst to analyst but I would be curious to get a no BS assessment. Thanks Flake.

We have all of these rules, checks, and barriers in place that are supposed to preserve the analyst's view and remove any outside pressures (be it from banking, trading, company management, or clients). How effective they are? I am not sure, I don't think I've been around long enough to know.

I do have a couple of examples that probably show we are still not entirely off the hook:

• For sectors that do a lot of banking business (follow-on capital raises and IPOs), if you want to drop coverage of a stock, you run it by your regional management first, who usually run it by our counterparts in ECM and IB to make the final decision. Same thing goes for initiations of coverage, sometimes the decision as to which company to pick up for coverage can be based on potential/future banking business.

• We get a couple of accounts once in a while who are not pleased with our reports and they make sure to let us know about it. The most recent example: Company A missed consensus estimates and cut their divided by 5 cents, however, my analyst expected this and the EPS and the divvy cut was in line with our estimates and what we modeled. So the title of the report was something like "Co. A cuts dividend, but in-line with our expectations". Within the hour, we have a pissed off PM calling us who was short Company A, asking "How can you publish an "in-line" report when the earnings missed and the dividend was cut?". Well, it was in-line with what we projected so...

Weird things do happen but I think the fear of losing your job on the spot because you violated the law is a lot greater than the consequences of annoying the bankers or a client. This was probably less true in the past (pre-Spitzer), but right now I think everyone is heavily monitored and plays nicely.

ensalada:

How often are you right? Are you familiar with the Random Walk theory? What do you think about it?

We have been relatively spot on with calling the recent wave of dividend cuts and EPS declines in our space. I came into ER during a period of high volatility and economic uncertainty, and so far we haven't had any extraordinary misses or beats. This is due to two reasons: 1) I think my analyst is pretty good with his assumptions, logic, and estimates and 2) our sector's earnings are relatively stable quarter over quarter. I really can't speak for the other groups.

We use very little stats and probability in our analysis, we usually base the direction of our estimates on our in-house view of the macro environment. We do not employ any kind of probability and outcome distributions. However, I am reading up on this now. I am currently reading "Interest Rate Markets" by Siddhartha Jha because I am trying to better forecast the book value of our financial companies (who typically invest in fixed income assets, hedged with swaps, and financed with short-term borrowings). When I'm done with this book, I will probably try to get a statistical software package which will help me calculate probability distributions given a set of interest rate moves/scenarios. I think this will be useful in estimating the fair value of some of these portfolios going forward. With that said, my knowledge of statistics and probability concepts is pretty limited and I would like to change that.

shorttheworld:

Flake:

I am a week away from hitting my one year anniversary of being in a BB research role .

BB is waiting until after Xmas to lay u off btw :( sry ggggggggggggggggggggg

stop giving kids ad vice and dload swtor fucker

i play swtor oO what server u on

FutureBanker09:

What level of the CFA are you up to? How do you manage to find time/ energy to study after working all day?

I will sit for the June Level 1 exam next year. We had a crazy year in terms of expanding coverage and I never got around to it. Given that the exam is 6 months away, I'm not too concerned with the time. I think the key is to start early, make up a study plan and then follow it consistently.

OhYeah:

Which aspects of your job do you find stimulating? What keeps you excited? I don't mean the specific tasks you do that you enjoy but what skills and intellectual traits that are required on the job do you like using?

Thanks for this!!

I mentioned in a previous post that I really enjoy when my opinion is viewed as valuable to a client and/or my analyst (even during your first year). I may be biased and uninformed here, but I feel like in banking (at junior levels at least), you just get work dumped on you by the people above you and you're only expected to do exactly what you are told to do. In ER you have a little more wiggle room to make your own decisions and provide your own input to the work that you are doing.

There are times when my analyst comes back from a week long trip and is a little behind on the news. He will actually run things by me first before getting on the phone with a client.

There are times when he is busy and will simply tell me to handle a call.

There are times when a room full of buy-side analysts have me on the speaker phone and fire questions at me.

Next year for example, I will have my own weekly note that I will be responsible for writing and publishing, with minimal support from the analyst. I hope that soon enough I will have a couple of stocks for which I am the primary analyst.

I just think it's a great feeling when you come off as helpful and it also feels like my time is really appreciated by others.

spaceagecowboy:

Yo Flake,

What do you think of the food/beverage sector kid? Is it good to follow?

I really don't follow the consumer sectors. What I can say is that my bank's view for 2012 is mixed. For the food sector, more of m&a and restructuring activity is expected over the next year, which would put a limit on P/E multiple upside during the next 2 years. However, stong balance sheet quality implies limited downside as well. Kind of a neutral outlook in my opinion.

Dr Joe:

Flake thanks for sharing. +1 SB

We should have more threads of this sort.

Not to be controversial/offensive, but curious to hear what an ER person has to say about efficient markets, and how you justify your existence if information is already priced in before you ever start writing your reports. If you are going to respond with "well we have a good track record of predicting xyz" then that's statistically insignificant and meaningless since there is surely a guy at the next shop with an offsetting poor record. Just curious to hear how you see yourself fit into the bigger picture, and whether you think about this at all.

Along those lines, specifically, when you say a company has great growth opportunity in X, so its a buy (or some really complicated version of such an argument) how do you respond to the "already priced in" argument?

Once again, I mean the above respectfully - genuinely curious to hear the other side of the story.

This is just my view but efficient markets are just a theory. I don't really believe the markets are efficient in practice. A lot of the investor sentiment can be driven by fear and irrational human behavior.

With that said, I think the existence of ER can be justified by the following few examples:

1) Providers of Information. I don't think most ot the buy side guys give a crap about our buy/sell ratings but I believe we save them a lot of time in their own stock picking process and analysis. I also think that our accounts like the attention they receive and the level of service a bank is willing to provide when they have access to a research analyst

2) Exploring and building relationships. Even though in today's world we don't technically benefit from banking fees, we play an important role in winning banking business. I know ER analyst's views should not be affected by IBD's dealings, but there are surveys (Greenwich in particular) that show the success rate of winning deals is approximately 4.5x higher for companies that are under that particular bank's research coverage. I believe that when a healthy company can demonstrate a great relationship between the ER analyst and its c-level management, that company might be more willing to hire your bankers for future capital raising needs, M&A, etc.

3) Going off of the point above, IB also enjoys an added layer of due diligence that ER can offer. It's not always that bankers want to put their firm's name on the tombstone of they think the deal will be shitty and tarnish their reputation. I've seen our guys pull their name after having discussions with an analyst who thought it was going to be a bad idea.

4) Marketing and non-deal related roadshows. ER analysts travel (usually with sales and/or coverage company's management) and promote their coverage and bring in account interest as well as trading activity.

5) Recent Greenwich survey showed that roughly 45% of buy side accounts pick their broker based on the research services that broker provides (vs. something like 20% and 25% that can be attributed to trading and sales, respectively). This is compared to a relatively low cost that's associated with having an ER department vs. paying S&T.

Just ran into this comment about efficient market. Having taken classes on efficient market and working in ER currently, I would say that you can think of equity analysts as the oil that keeps the efficient market wheel well greased. In other words, efficient market exists when information is fully communicated so that investors will invest in the right stock which causes the price to reflect the fundamentals of the company at all times. Who provide and communicate those information that keeps the market fairly priced? The equity analysts. However, without access to sound information such as analyst reports, the efficient market model cracks down - asymmetric information (which can never be fully eradicated) rules, and arbitrage opportunities arise. So your question is rather self-defeating. "What is the use of equity analysts when the market is efficient?" Well, it is because of the information work of equity analysts that the market can even approach any level of efficiency.