Just trying to make my process more efficient and see what others do. Say a boss gives you a ticker and asks whether or not it's a good short/long, what's your order of analysis? Here is mine:
1) Check out the web-site
2) Latest 10-k / 10-q
3) Transcript calls
4) Investors presentation
5) Research (initiation of coverage reports + latest reports)
After that start digging deeper depending on the idea
This is from the perspective of my personal experience with a little bleed over into what I do (Research) - but I believe strongly in testing out the product. Of course this isn't feasible in a lot of situations, but when it is I'll do it.
Another thing is to see how the incentive programs are set up - how much of a direct stake does the management have in the performance of the company and over what time horizon (i.e is the compensation tied to 1 year, quarter to quarter or 5 years).
That's interesting that you mention the website thing - I do that to, except I really look at the layout, quality of code, etc. Sometimes the sites that look shoddy are actually for great companies (it sort of reminds me of Livermore's analogy in Reminiscences of a Stock Operator where he discusses one guy giving him a bunch of really nice paper with statistics and the other guy giving him statistics on the back of a recycled envelope - imagine which company went bankrupt [hint: the one that spent a bunch on useless shit like paper for some ape]).
Occasionally in the 10K or through insider buy/sell I'll find some interesting stuff as well - like a company using tax credits designated for film production to offset their obligations, or a guy taking a loan out to pay alimony instead of selling a single share. It's the shit like that which really sticks out after you have gone through more than 500 10K's imo, and it means that you are on to something.
I never look hard at the investor presentations, usually I try to focus on how the management approaches shareholders when they have had a horrible year through letters (some of the letters for the Allegheny Corporation y really exemplify the "right way" in my mind - being honest and straight up and the performance since the crisis has reflected accordingly).
Another thing about the transcript calls is to see what kind of analysts are on the calls and how much boot licking they do, sometimes they will feed management easy questions, sometimes they will lead into an area of strength etc. If I see too much BS like that I will immediately get suspicious.
Usually I get pretty excited if there's nothing out there about the company.
I start the research process a little differently than -- what I would assume -- most people do so I'll do my best to explain it here to offer a bit of a contrarian process. So here goes nothing...
I choose to answer questions in a certain order rather than use tools in a certain order as I begin developing a thesis. It might seem a little scatter brained and inefficient as I go back and forth to the same sources and documents throughout the process, but it has made my research process more efficient. I figure if it works for me it may work for someone else.
Tools I use: - Any SEC filing - Transcripts - Management access - Sell-side analysts (not a whole lot) - Industry contacts (extremely important) - Customers/consumers, etc.(also very important)
It's my (possibly very wrong) belief that many equity investments are essentially macro-economic bets executed on a fundamental level. Therefore, the first thing I need to know about a company is what drives its revenue, and, even further, what drives the revenue drivers. If I like the "macro trend" (please forgive the term) for the revenue driver(s) than I can start to look at the company as a potential long or vice versa.
Example:
Corporate/government IT spend is a revenue driver for a lot of technology companies and GDP is a driver behind IT spend. Therefore, if I'm looking at a tech company that gets a lot of its revenue from corporations/gov'ts to determine if it's a short or long I'm going to get a (general, at this point) feeling for the direction of the economies in which the company does its business.
At this point I'm either going to proceed with this idea as a possible short/long or drop it (either completely or shelf it for the time being.) Really the only reason I would drop it at this point is if I don't feel like I am going to be able to understand everything that is driving revenues well enough to handicap it for the purposes of putting 8 or 9 figures behind the company.
At this point I want to get an understanding of how my target is situated against its competitors and how the business interacts with customers. Essentially, I want to understand how my target is seen from the perspective of its competitors and its customers as well as the company's value proposition and if there is any durable competitive advantage as Warren would say.
At this point I'm beginning to get an early feel as to whether this will be a short or long idea.
I'm looking at three things here:
1) Executive Compensation. I want to see what metrics are being used to compensate the management team and if it meshes well with my goals and time frame for investment as an investor.
2) Make- up of the Board of Directors. Who is on the board? How long? How many boards are these people on? Friends of management?
3) How management has operated the company up until now as well as their capital allocation decisions. This is the most important part of the research process for me by far. Before I do a deep dive on a company I want to understand management's vision for the company and how well their past decisions have paid off up until now.
At this point I'm going to know whether I'm looking at this as a long, short, or nothing is going to happen right now. I'm either going to do a deep dive or shelf it for now. For the purpose of this write-up I'm going to assume this idea is moving forward as a long.
Deep Dive
At this point I'm going to go to my boss and the most senior analyst and basically just bounce everything I have so far off of them. I do this as a courtesy to them because they've both invested a great deal of time and effort in my development so far and to avoid my own confirmation bias. They are both not afraid to blow a hole in my thesis or give me another perspective I explored yet and I am very glad I have a co-worker/boss that is willing to do that in a constructive way. If I come out of that conversation with anything new/questions I will take care of those immediately.
4) Financials
Now I am going to break down the company's financials in pretty great detail and see if anything catches my eye, either good or bad. This is where I'm going to get in to the notes to the financials on the 10-ks and 10-Qs going back several years. How many years I go back depends on the company, industry, and current operating environment.
5) Speak with Management
Now I am going to try to get in front of management to answer any questions I have accumulated since I began researching the company.
6) Model
At this point I will sit down and model out the company as much as I can with the information I have accumulated up until the point. I will not be able to finish the model in one sitting as new questions and things I did not consider always show themselves at this point. I then do whatever I can to answer the questions and finish the model as the questions are answered.
At this point I'm going to bounce everything I have off my boss and most senior analyst again as well as some friends in the industry and people whose opinion I respect. I will usually come away with some new thoughts and more stuff to think about.
7) Pitch
I am now going to develop my pitch and make sure I can cover any question someone throws at me about the target company in my sleep.
In order: 1) K 2) Most Recent Q Transcript 3) Q 4) Initiating Coverage (at least 2) 5) Recent Q Commentary by Sell-Side (as many as possible) 6) Most recent Investor Day 7) Proxy 8) Industry Overviews if complicated 9) Industry Expert Calls, Academic Research on Industry, Misc Field Research 10) Most Recent Q of all Competitors (to gauge general mgmt sentiment of current environment) if Applicable
I like reading Q commentaries and competitors Qs as well. How long does it usually take you to get to the point of going more in depth?
All of what I listed usually gets me up to a pretty competent level, and after that the biggest ways to feel like I'm actually confident I know a business well enough to speak to anyone about it usually come down to speaking with management, competitor management, customers, and any industry experts I can find. That's where the real nuggets are, and the alpha.
Edit: Forgot to even really answer your question... I'd say to accomplish that 10 item list it should take me about 3 weeks or maybe a month, which includes spending the necessary time during market hours understanding how the stock behaves day-to-day based on whatever macro news is out there, or industry news.
Liking this thread.
1) Any decent research I can get my hands on (rare), try to learn what the business actually does and its history quick (it’s shameful how bad some ER is, I often think why do they bother? There’s no value in add putting no forecast, no views, just financials and a narrative on the progression from last Q, no explanation though, on a page…anyway ). 2) Identify drivers and their drivers in turn. 3) Model out historical financials for c.5yrs, like to see how the business has evolved. Focus on quarterlies, FY are too contrived in their message, only good for accounting disclosures. 4) Call transcripts 5) Technicals (not as in charting, like the relationships between sponsors / equity holders / bond holders / bank debt holders / jurisdiction). This is one of my favorite parts, seeing how the transaction will evolve given the participants. 6) Comps / potential restructuring / refi, basically see what sort of a play we’re looking at. I try to leave this as late as possible so I don’t anchor my mind into one sort of outcome from the beginning. Look at structure / legals. 7) Management call if available 8) Model out forecasts (timing of this varies due to level of cash burn) 9) Talk to advisers in the market (focused on distressed, so lawyers are helpful) if in / near restructuring
You guys mentioned it takes 3-4 weeks to get everything pat down. Does this mean that you work on one idea during that time or how many do you usually do simultaneously?
As a follow up, because of the length of time it takes to fully understand a company, how do you narrow down the ideas from a pool to pick out which to do full blown research?
At any point in time my coverage is between 80 and 85 names. At any time I will be managing 3 to 5 active positions and doing in depth research on 2 or 3 names.
Really hard to explain. Experience helps, talking to others, random ideas. The sourcing process is different for everyone and just really difficult to explain effectively.
While the catalog of names I'm following has expanded since the day my career started, I'd say the names I'm "actively" following are in the 20-25 range, with probably 2-3 that are for one reason or another very top of mind, and 1 new idea that I'm researching intensely. I think I've gotten good enough now to know when an idea makes sense to pursue heavily so I can devote all of my free time to it without being wrong about price or running into something that completely shits on the thesis I thought I had.
Just wondering but who in the chain makes the decision to research a company? Is the analyst, associate or both?
Company presentations from capital market days are also pretty useful to get to know more about an unfamiliar companies.
Invaluable infomation on the research process for someone like me trying to (eventually) break into the AM/HF world, much thanks.
My list def isn't set in stone though either. Depending on the company and industry, I may flip around some stuff in the middle or kinda simultaneously work on two things at once if something catches my attention. It's safe to say that things can be pretty fluid outside of #1, #2, and #10.
May sound like a stupid question... Do you conduct any technical analysis or keep it fundamental?
Ok but no chart analysis whatsoever? Using indicators, channels etc
Zero technical here. Value shop so technical is really irrelevant to me. Good business, strong management, and catalysts are what i worry about.
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