Non-BB Equity Research Q&A with First Year Analyst

dudguy:

Can you go through an average day in your life?

Also, how much do you make (range)?

Average day:

7:00 AM - in the office 7 - 8 AM - read news, catch up on transactions covering 8 - 8:30 AM - talk with director of research, chat about data coming out, companies covering 8:30 AM - 12:00 PM - company research, writing reports, building/updating models, listening to conferences 12:00 PM - 12:30 PM Grab lunch and scan news, continue reading 12:30 PM - 5 PM - Continue with morning work, but often will also have conference calls with clientele, meet with superiors to pitch ideas, go over thesis, etc. 5:00 PM - 5:15/30 PM - Finish up and leave

** When reports are going out, typically will be later, but our reports come out monthly so we have some weeks where it's less. All in, probably like 50 - 60 on average of solid consistent work.

I'm not in NYC, so obviously there's a haircut there. Also, given less experience, there's a bit of a discount there as well. So below bulge bracket based on cost of living, and a slight experience discount to consider as well. Although it depends on the shop, most of the time you start lower, but company growth & your comp are more closely tied.

Maherj1:

Love these threads...keep them coming.

Few Q's (and sorry for being blatant)

Difference between BB and non BB compensation. How much does this vary? For instance are their ER shops that pay really bad money (sub big4 pay lets say)?

Exit ops compared to BB?

How difficult is it to make the transition from non BB to BB/upgrade shop

Does the work differ from that done in BB? Is the client base vastly different and do you get as much exposure to company management/buy side

For comp, see the above post. Like i said, depending on the shop, it could vary significantly. One shop I was at the guys left hedge fund gigs to join, so they're comp is quite fair. Relative to BB, though, you'd obviously take a cut.

In my opinion, though, near term differences are likely resolved in long run, particularly with the QUALITY of where you're working. Which leads to exit ops -- could see jumps to MM shops, large buyside locations, potentially even BB if you network well (what else is new?) My job helped me break into a more boutique buyside value shop that's growing nicely.

Clientele should not be extremely different -- large/small hedge funds, long only players, money managers, etc. It also depends on the type of research you're providing -- for us, being generalists, a primary sector-focused fund may not see enough value if the transactions aren't hitting his/her space specifically.

freemarketeer:

Did you get recruited out of the sell-side? If not, how'd you get to the buy-side?

A few months ago, I got a call from a former internship location saying that they knew I had a job, but had received a request for a referral for a new analyst to join the team as the company was expanding. He passed me along, and the buyside shop and I had a phone interview + in-person interview with five team members, along with submission of a bit of work on a company they assigned to me.

So it was not formal recruitment, per se, but more referral-based and a good fit with the team at the shop.

acelion, unfortunately the answers to these questions are not concrete. in general, I would say "it depends" to each.

Let me elaborate:

• To your first point about going in out of UG, I would say yes, it is possible. One of the firms that I worked with had a lot of junior analysts who came directly from UG. The shop was somewhat bigger than other independent shops -- about 30 - 40 people (mostly analysts), and has gotten bigger since. So I would say that the size of the independent firm matters. Also, you'd want to get a sense of what specifically the firm is covering to kind of see how hiring cycles.

For example, if you're a special situations shop (like mine), and you're seeing business cyclicality causing a vast amount of restructuring activities, then hiring needs will be on an uptick, particularly if the moves are sustainable. If the shop is a more traditional sector-by-sector coverage company, then hiring needs will be more based on the success of each sector in getting their product out there and having bandwidth needs to support a growing client base.

• Current hiring situation, again hard to generalize. But anecdotally, I know of several firms hiring now that haven't been on freezes and haven't cut capacity either in the midst of a struggling environment. This is largely based on the structure of independent ER -- once you gain a relatively large client base, you retain about 75-80% most of the time (some of the churn is based on either (a) person buying it just didn't use it; (b) budgetary cuts that prevent them from really doling out cash for other ER that they can get essentially free from other sell-side shops). The 20-25% churn is replaced by new customers, so essentially the revenues for the business are pretty stable, particularly if it's an up-front subscription fee not directly tied to trading performance. (**Note that these figures and % estimates are not exact and not always the case, but comparable to what I've been told).

• I don't think it's too late to apply at all. I got hired at two shops during "off-cycle" time at other large places. Since the shops tend to be smaller, they can fill needs when they need them. And if business is booming, they're always going to be looking to add talent. I'd say go for it. For a young person coming directly out of UG, yes you lose some of the structure that you'd get at a BB, but you also get a TON of responsibility, and really learn about what drives stocks fundamentally -- because if you're consistently wrong in your investment analysis for clients, you're product won't sell and you'll be out of work. Major BB shops have the same pressures as well, but they have other revenue areas for the firm as a whole that can/do help provide more security than a pure independent ER firm.

Keep in mind, these may be biased opinions, but this has been my experience and I've been thrilled with the experience gained, the knowledge picked up, and the quality of the guys I work with and the clientele I get to talk with every single day. In my opinion, my experience has been just as good as that of other bigger places, but that's also a matter of personal preference.

acelion:

Good to hear!!! I will definitely start applying to ER firms. I am actually a fan of Special situations. Is it possible you can PM me shops that are hiring. Especially Special Situations.

Acelion -- unfortunately, the hiring process is very case-by-case like I said above. If I were you, I would do broad searches for maybe independent ER firms, see some of the names and backgrounds, where they come from. Then use some of that to drill down further.

Also, depending on the special situation type, you may find some places that are better than others. Cast a wide net in seeing what is out there, and then worry about sub-specializing. Fortunately for you, it would seem to be easier to go from working sector specific coverage to being a generalist doing special situations. The reverse route can be more challenging for obvious reasons.

monkeyc:

when you make those supply chain calls, how much of it is to verify your hypothesis and how much of it is to provide info to clients on what is going on/earnings expectations

I don't want to speak for every single independent shop out there here, but in our case, we have a pretty robust screening process for getting to the names that we really sink our teeth into.

So on my conference calls, most of the time it's more talking with clients about what is going on -- breaking down stages in the process, what we think it means, and how it makes our call meaningfully different from what is being priced in. You'd be pretty surprised in special situations just how much value can be gained just from understanding the process, even if it's a pretty huge company undergoing change.

blueslord2910:

How do you think about spending summer in a boutique buyside shop? I'll be working with ER to help them on their analysic and maybe some slides as well.

I think that it is a great idea. It will give you some good exposure to the business, and can be a good stepping stone to other things as well. If you are interested in ER and have an ER gig on the table, then it's a no brainer. For any student I think this would be great exposure.

Ultimately, if your goal isn't to be at a BB, then you need to focus less on tailoring your resume to their "ideal" candidate, and more on getting experience that will allow you to grow into a good analyst wherever it is that you end up.

energyanalyst:

What you think my chances of breaking in Oil and gas Equity with a degree in Engineering and MS in Geophysics...some 3 exp of O &G industry. will get CFA level 1 by end of this year

I am planning to shift by 2013...Advice will be appreciated...

Thanks

Sounds like you have a good base to go off of. Level 1 will at least show that you are committed to making the switch. Your timing of entry should be flexible -- you never know what the market in oil and gas will look like a year in advance.

I'm no expert on oil and gas, but I'm fairly sure that your knowledge of the industry technicals are up to snuff for a lower level analyst job. I don't know how easy, though, it would be for you to jump to ER and get a more senior level role without ER experience first. Best wishes in your search but you sound like you definitely have a good base to go off of.

Make sure to be ready for the finance-related technicals though too. You may know reservoir characteristics better than the next guy, but if you can't demonstrate to your interviewer that you can make a differentiated stock call based on financial analysis, it won't help you. Hope this helps.

Gate_Crasher:

Hi, good thread. Is modeling hard ? Do you have to be able to build models from scratch ? Do you still learn on the job ? I find the CFA to be useless. Thank you

Modeling is not as hard as gaining the insights behind the inputs selected. That is what differentiates the analyst. Anyone can build a model with practice.

Other threads have commented on models from scratch. Most of the time you'll have a template to go off of.

Leaning on the job- YES. That's what I love about my job. No days are exactly the same and I want to learn something new every day. Even experienced guys will tell you that.

CFA designation - very helpful in terms of having a profile that is competitive (just look at the number of analysts out there with it and pms who have it. However, by itself it is insufficient to make you good at your job.

justdrop:

Do you have any restrictions on your personal trading account?

Customary restrictions -- pre-clearance of trades through compliance, no disadvantaging clients or even giving the appearance that front running is occurring. Client first is a must

arzoo:

I woud like to know how you to go about the research & analysis part of your work:

1. For example, you are given a new sector &/or a new company to cover, can you elaborate on the steps you take in setting up coverage up until you call a buy or sell / issue a report.

2. What were the resources that help you most in learning valuation, modeling and company analysis?

Thanks for the great Q&A

(1) On the new coverage side, like I said before the special situations realm is kind of unique in that there often tends to be momentum in a given sector for certain transactions and situations. So it helped in that a lot of the background work on an industry was done when you moved between companies. Now, in the example of a new coverage company, we had a value focused approach, so we did a lot of reading via 10-Ks, 10-Qs, conference calls, presentations, etc., as well as used industry resources to get familiar with the company strategy and how ultimately we could gain a basis for forecasting results for that company. Pretty standard process in that regard, just how we really found a company for coverage is different from other folks. More info on processes can be found in Flake's ER Q&A, and Black Hat's HF Q&A is very informative, particularly on value investing side.

(2) Valuation -- much more art than it is science. Yes, you need to know the basic building blocks for how to get your inputs (sources like WSO, BIWS, various books can be quite helpful), but ultimately the tools are only as good as the craftsman.

Company analysis and valuation is best learned, sadly, when you have made a mistake on a call. You analyzed XYZ and figured you were dead on, only to have it go against you. You'll learn way more that way than anything else. But truthfully, if you want to get good at analyzing companies, the only way to do it is to work with real companies and practice your craft.

I don't know your situation, but if I were you, this is what I would do:

(1) Pick a company in a sector that you find interesting. It would be helpful to use a business that you can understand to really learn the mechanics. Once you find that company, spend some time reading through the 10-K...all the way through. Tedious, yes...valuable, yes. Remember, you're trying to learn how to do this well. In the future, this won't be necessary, but starting out it definitely helps. Maybe consult a few recent 10-Qs as well, particularly the MD&A sections and notes to financial statements.

(2) Read conference calls for a company that you like -- if you don't have access to Bloomberg or Capital IQ, free sources like Seeking Alpha or Morningstar do a pretty good job in getting these up in a timely fashion and relatively accurately in terms of language. It would be helpful to sit down and listen to a webcast along with the transcript, to really understand the ebbs and flows of these calls and what ultimately are the key points that are being asked about.

(3) Use industry resources to gain a better understanding of important trends, data sets, and general supply/demand characteristics. Google searching for simple things you'd like to know can be really helpful.

(4) After you read things like this, try to put it down in your words. Someone once told me that if you can't write it down cogently to yourself, you don't yet understand it. Work through 1-3 until you can.

(5) This is all done to learn about the company and the industry and the drivers and important metrics.

(6) I would highly recommend BIWS to learn modeling. Having done your background reading, use the BIWS program, and build alongside the tutorials the company under consideration.

This is time consuming, but it's worth the effort and will really help you. Hope this helps!

tangent style:

Could you talk a little bit more about how you got that internship during your MBA despite it being non-target?

This came down to a lot of persistence and willingness to hear no I guess.

I went directly from UG to MBA, knowing that I wanted to do ER, and also being naive as to how difficult making the move would be. Without experience, companies want to put you at a lower level position (obviously), but they won't give an MBA a spot in those to keep it open for UG. After applying to ~60 shops all over the country, I learned this lesson quite well.

I was fortunate to have a friend with a lot of industry experience ask to see my cover letter that I was sending out. After getting it, he ripped it apart and broke it down to one paragraph that, in essence, said "I want to work for you and I need an opportunity. I love what you are doing and want to be a part of it. I'll call you on this date at this time to introduce myself."

I sent that out to three more prominent independent shops, and spoke with each one of them. It happened that the company I worked for got a ton of resumes and cover letters, but the fact that I was direct stuck out to them, and it appeared that I was teachable. I got a great piece of advice during that process that I've stashed away for my career: No one will give you anything you don't ask for. I asked for a job with that company because of a few simple reasons I had learned about them. That was enough for them.

Like most things, it came down to persistence, and pushing until someone gave me a shot. And the more time that I spend in this business, it's a lot easier to understand why it is that way.

tangent style:

A couple of friends and I mocked up our own ER on a company for a competition at our school. Is it acceptable to reach out to professionals and ask them to look at it and offer criticisms?

2 things to consider here: (a) length; (b) who it is going to

(a) Length: if you are going to send something, make sure it is manageable in length. We read all day, so keep that in mind.

(b) If you know a person to whom you would send it, ask. If you are going to do it, make sure it's not during earnings season. No one will be able to get to it. Just be mindful of when you send it and how long it is. Also, if you really want to send it, make sure that your work is something you'd be proud to be associated with. No one expects you to be a great report writer yet, but you should still do as professional of a job as you can for your reader to take you seriously.

burnsy:

1) Do you see ER growing dying or remaining steady in the next 10+ years. (forgive me if this is a stupid question, just been reading up on this in particular in the last few days) 2) What do you see yourself progressing onto in the next stages of your career? (Career path from now) 3) How many in your team?

(Sorry if you've answered these questions above, didn't read them all)

Thanks for doing this

burnsy:

1) Do you see ER growing dying or remaining steady in the next 10+ years. (forgive me if this is a stupid question, just been reading up on this in particular in the last few days)

Saw this thread a few days ago and thought it was interesting. Being younger myself, I don't feel as qualified as others may be to really give a perfect answer as to what is going to happen. From my perspective, though, it seems that a lot of highly skilled analysts are located on the buy side. That's not to say that the sell-side analysts are not good -- many are. But the roles between the two sides are different.

Sell-side analysts exist more for access to management teams, developing accurate earnings estimates, and helping their clients generate trading revenues. On the independent side, two of these may be true, while the management aspect is often excluded beyond conferences and such.

Buy-side analysts exist to generate actionable investment ideas for their funds to allocate capital. No buy-side analyst will take a sell-sider's word as gold. Even when I worked in the independent side, we always knew that clients were going to have their own analysts do their own work on the ideas. Even now being on the buy-side I tend to use the sell-side research pieces as checks to see if there was any key basic business elements I may have overlooked in my own analysis.

I don't think that this business will die, nor do I think outsourcing to other areas of the globe is the end-game here. Language barriers are a huge issue, as are time zone differences. Depending on the time horizon of an investor, this can matter pretty significantly. I do agree that there tends to be a ton of coverage on many stocks that may be less value-add, but who am I to tell a company that they shouldn't staff an analyst on a stock that already has 30 analysts on it?

Ultimately, if you make yourself valuable in your job, and there are a lot of valuable analysts out there, I find it hard to believe that the industry ceases to exist in the form it is now. There may be shifts in the number of analysts on one side or the other, but I don't see eradication as the end game. Or at least I hope not, because I happen to really like my job.

burnsy:

2) What do you see yourself progressing onto in the next stages of your career? (Career path from now)

Based on my post above, I've moved to the buy-side now. I see myself staying here for a long time. I really like the team I work with, and I really like my PM. The company is great, culture is awesome, and I really enjoy working with the guys that I do. I have a ton of autonomy at this stage in my career, which is great, and I get paid to fundamentally analyze stocks.

I want to stay here and progress further, potentially with managing a portion of the book myself. But I'm very content to stay as an analyst for a very long time. I had considered the PhD route before, but I couldn't leave the analysis aspect every day. I do think at some point that I would like to be involved in some form of teaching a night class or something like that at a school -- I had a professor in grad school who did that after a long career, and that could be cool. But I'm very content right now -- I have a good work/life balance and the growth opportunities are tremendous.

burnsy:

3) How many in your team?

I'd rather not disclose the exact size, but it was smaller on the independent size, and bigger now that I've moved. That being said, there are larger independent shops as well.

energyanalyst:

When you say young , just curious How old you are ????

Mid 20s

tangent style:

I'm not sure how much it might relate to your work specifically, but do analysts ever get any kind of benefit from being familiar with another language and culture?

Unless you're working in the international realm, I'd think it's not as major of a value add as it would be in other jobs.