Buy Side Equity Analysis
Couple of friends are looking to start a hedge fund and I said I was interested in helping out, and dipping my toes into the pool so to speak. My friends gave me a couple of equities to research and write 1-2 pages.
Anyone have any guidance on what those 1-2 pages should look like? Templates and examples would be awesome. Most importantly, I have never done modeling, but my gut says that I should do some so any Excel models or guidance in that direction would be best. Please remember this is Buy Side, but then again I have no idea if that will change the format and content.
Thanks in advance.
I work as a part time analyst for a buy side shop. The layout of your report really depends on the trading strategy they plan to use. Are they doing a value investing strategy? Statarb? Event Driven? There isn't a general format for reports. The key is to say a much as you can with as little words as possible. Wasting someone's time is the worst thing you can do. I would definitely put a small executive summary at the beginning that outlines all the points you make and your conclusions based on your assumptions.
You are going to want to value the companies using some type of DCF/multiple analysis, talk about the outlook for the industry and the company in particular, and any catalysts you see that will affect the companies growth/revenue in the future (whether downside or upside). I think the goal is to see if you can value and know what to look for and how to manipulate their reports.
Damodoran has free templates on his site for modeling. Hopefully the companies they gave you are mature with stable growth so you only have to do a 2 stage model
just steal a few paragraphs from good equity research reports. fuck the model. just look at comps.
and what Determined said above is key --> what is the strategy of this fund?
In regards to the strat of the fund, it's a new fund and I think my friends simply want to see what type of research I can do.
In regards to DCF/multiple, does this analysis lead to a price target? Are there concrete methodologies? What's the step by step process? Anything that provides an applied practice rather than a theoretical approach. The main point is to "value" and what to look for, well what is the process?
Thanks again everyone. Not only is this informative for myself, but I know it must be others.
Do you have a finance background or are you just good at asking questions?
yes, it does lead to a price target. a dcf will give you a value of a company based on their free cash flow. a two stage is where you model out their cash flows and reach a terminal value at the end of your projected years. you're going to need to get a template for a model, identify some assumptions on growth, find out the companies capital structure, and plug and chug.
don't "fuck the model". what is this a homework assignment where you want to dick round? why dont you look at comps and tell me whether or not i should invest in MCP. really, i'd love to know how your comps are going to add any value whatsoever. if it's trading below the competitors based on straight comps it must be a great investment, right? get the fuck out of here with your rookie shit.
I took Financial Econ in college and outside of day trading, I have no finance background. Like I said my friends are requesting this info to see my product and possibly bring me on board. It's an intriguing opportunity and I'm asking questions to get a grasp of the process.
Something Creative, thanks for your help. I've been reviewing Adamodar's class website and it's helpful. My original question is a template for a model, where's a good place to find one? Also, a template for equity report or hell an actual report would be awesome. I presume CapitalIQ has equity reports from analysts, correct?
I presume all other necessary information for a DCF is found in the 10k, correct?
the dcf is the most overrated piece of shit tool out there. sure, create one as a sanity check for your comps. and if no comps exist maybe consider looking at historical multiples. the dcf is complete BS, esp if the OP is targeting growth companies. let's see, extreme sensitivity to most of the traditional inputs.... discounting cash flows at WACC? now tell me, how would you come up with a decent estimate of the cost of equity? the 10yr note is 2%, pull a market risk premium out of your ass, then use beta? which any novice financier should know is the single most bullshit measure of risk out there.
listen kid. look at comps if they are available. that is the most straightforward method. adjust for growth or any other differentiating factors among the peer group. if you have the time throw together a quick dcf as a sanity check to what the multiples tell you.
and yes, you should be able to get most of the info from the 10k, but i would urge you to check out the press releases as well.
Comps doesn't apply to this company. The firm is semiconductor biz with a significant part of the biz in military products. Or maybe I don't really understand "comps"
why don't they apply... they always apply.
Please read this and thank me later: http://macabacus.com/valuation/comparable-companies
They apply, but they don't seem to supply a price target. Comps are useful when determining if a firm is a buy vs its competitors, but what if the firm's competitors are overpriced? I think a price target or a more accurate assessment. Thoughts?
How are they not supplying a price target? What multiple(s) are you using? And if you think they are overvalued - state your case; there's your research and your case for buying the company (if it is undervalued relative to those competitors).
Good points. I think I have a good grasp on what I should do here. Google is my friend, however, it's been unable to provide a template or sample of a buy side equity report.
I guess I'm too much of an engineer. It seems like a price target is merely an approximation rather based on valuations rather than a more definitive answer. It seems arbitrary almost, but it supposedly defines a good report vs a bad one
Write an executive summary, clearly state your assumptions, have all of your points follow logically/explain clearly and attach any data/models used in addenda after the report. You don't need some template to tell you what to do. Make that shit up on the fly, like a boss.
Headers and footers make everything look more professional. Also consider outsourcing this project to India.
I'm kind of curious how you were day-trading if you didn't know how to value companies? Were you strictly following market fluctuations? I guess I understand if someone doesn't know what the term comps is, but understands the meaning behind it, and the same with DCF.
But unless you are just pulling growth projections out of the sky, you won't find out all of the information you need from the SEC filings, you need to look at industry reports for projections in the growth of different costs and revenue based upon the economics of the industry, otherwise you should tangibly explain why the growth figures you come up with for your projections make sense.
Saying you expect RIMM to achieve 50%YoY CAGR for the next 3 years because Apple did won't really make sense unless you can make a compelling argument as to why their trend is going to change (the CEO started shitting bricks of gold and perfect diamonds, etc)
Comp analysis is geared toward valuing for IB/LBO/M&A, not buy side equity analysts. I've been in buy side AM for ~6 years . At no firm that I've been at do they use comp analysis more so than for a supplement to running a FCFF analysis. This applies to both LC and SC, and not any micro cap strategies.
I also think they want to see that the guy has a grasp of whats important and whats not. The value your DCF spits out is not as important as what assumptions you use and why you use them. The key is also catalysts. What drivers are there that are going to affect your company up or down. What advantage do they have or lack in their industry. What about macro level.
DCF's are tough to use in a multi stage firm with irregular growth patterns, but I'm willing to bet that a semi condcutor provider for the military is a stable growth company where it's not an issue. Is it TXN, INTC? These are all stable mature growth.
No, you are not going to use a 10yr yield as a good assessment of the Rf. You will want to use your own value. Try a 5% and you can find their WACC looking at their financials.
10k and 10q are what you are going to want to look for.
Here is a link to some models
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/spreadsh.htm#cf
Analyst reports are going to be on CapIQ, Factset, BBG, etc. If you have a brokerage account you can probably find some there. Not sure if they will be free or not outside of the BBG, fact, etc.
If I were you I would write up a two page paper on what you think the company strength and weaknesses are over the next 1, 3, 5 years based on macro and micro level factors. What you value the company at based on your models, and supply them with a model that has an additional page (or comments in the cells where your assumptions are entered) explaining your assumptions.
Plus I think that the majority of people here are simply repeating what has already been posted and very few are actually in the industry.
As for the firm, think smaller, KOPN, ONNN, SLAB, CREE, ARMH, BCDS (All Firms with a similar PE)
Thanks again.
I imagine it's a company like MSCC, HITT or ARX? Those two companies have heavy military exposure in the semiconductor space. You need to really focus on the US and International defense budgets and more specifically what electronic content is doing (more UAV's, satellites, GPS, etc.). Build yourself a standard operating model for 2-3 years out on a quarterly basis and value the firm off of P/E ratio. Rarely do you see semiconductor stocks trade on anything but P/E or EV/Sales. Both companies are going to trade at pretty steep discounts to their analog peers due defense budget concerns. For peers, I would stick with LLTC, HITT, SMTC, ISIL, TXN, MXIM, MSCC, ARX, SLAB, and FCS.
DCF's couldn't be more pointless so don't waste your time there, although building an operating model is similar.
You must not work at a preftigious shop coz I work at a preftigious hedge fund whose name would make you jizz your pants, and I can tell you for sure that none of the serious preftigious investors use DCFs brother ... everyone uses comps.
OP, if you can't find decent comps coz of multiple businesses, then break down the business lines by EBITDA and do a sum of the parts valuation.
E.g. company BuySideTroll has 4 divisions. MakingPPlMad, UmadBro, Preftige, and AlphaBro. Normalised EBITDA for the company is USD 500mm. No good comps, but there are comps for each of the divisions.
Sum of the parts valuation might look like this: Division - EBITDA - Comp. avg multiple - Valuation
MakingPPlMad - 100mm - 4x - 400mm UmadBro - 50mm - 7x - 350mm Preftige - 200mm - 6x - 1200mm AlphaBro - 150mm - 3x - 450mm
Total EBITDA - 500mm Sum of the parts valuation - 400+350+1200+450 = 2400mm Implied EBITDA multiple - 2400/500 = 4.8x
Cot damn, don't ever value a company coz of some WACC or equity premium you pulled outta your ass.
And if the company really has NO comps at all for ANYTHING it does, then just use your preftigious investing broscience to come up with one (based on company's market share, growth, EBITDA and FCF conversion etc). Obviously it takes experience to be able to do this, but the whole point is so that you come with with an answer to "what multiple would the market pay for this business?"
Peace, bros.
Comps do not give you a long term outlook on a company b/c you don't control any drivers. Comps can give you a basic PV of the company compared to peers (which incidentally works great if you're valuing for IB/LBO/M&A, but not for intrinsic long term valuation). Great. If i want to do a short term trade based on some type of irregularity i might try some EBITDA comp analysis to make a quick buck. I can create an algo to trade L/S based only on multiples, except that's not going to give me a true value of the company, it's going to give me some trade ideas. At the same time i can trade technicals and do the same thing.
Not all companies that are in a sector are going to be similarly successful. Not all are going to grow the same, nor are they going to have the same drivers. That's why analysts meet with company management and go on site to visit HQ. There is way more to it than running a comp or even a FCFF eval. A ton of analysts put out reports and and give out models with those reports. You think that its a giant secret that a consensus multiple is X? That you're the only one that knows that EBITDA should trade X times the sector? My god bro, sell me your models! What makes a good analyst is taking all that info and using your skill to create assumptions that will more often than not be correct based on the 10k's, 10q's, conference calls, in person meetings, visits, macro and micro level factors. The control you get from a FCFF is more valuable when truly trying to get a long term target on a company.
Prestigious HF? I think your frat bros might need help setting up the keg, bro. An unrelated free piece of advice, try to avoid sounding like an idiot in how you write and people may take you seriously.
This is all really great stuff. Looks like I need to spend a good amount of time in Columbia's B School library and hit CapitalIQ, and Bloomberg. Going to reach out to firm's employee and industry experts to get opinions about the firm and competitors. Thanks.
I want to invest in this hedge fund.
Holy shit my thoughts exactly. Where do I wire the money to? This kid is fucking going places.
Couldn't have said it better, all I need are the wire instructions and I am in!!!! Kid can't even answer what the strategy of the fund is, but he sure is going to be great
^Epic response Something Creative.
NA
DCFs are for bankers. GTFO
Okay, got some assistance from 2 buddies, 1 is a real estate fund guy and another is a guy at SAC.
1st, I'm repeating what they said because it may be informative to others. This is not an attempt to call anyone out or disparage anyone.
2nd, DCF is garbage and they laughed when I mentioned it. They said that most MBA's and finance students immediately try to use it and it sticks out like a sore thumb. They said find an industry metric in 10k and 10Q or use a sector established valuation metric. Ex., Subscription based industries would use ARPU. Or for semiconductor like the industry I'm working on is usually EV/S because output is capital intensive.
3rd, The key to these reports is to find the metric, differentiate it between some comps and show how the target of the report is "different".
4th, Talk about the industry, understand drivers and possible growth oppts and risks to your target.
5th, Analyze the risks part of a 10k/10q, understand risks and discuss. These are going to be the meat of your report in some form or fashion.
It sounds like you should clearly use multiples then based on the consensus. Not sure why the difference. Maybe investment philosophy or holding period or something. Can't imagine it's simply HF vs AM. We're long only, mainly institutional and funds, and have a long holding period. Our analysts mainly care about FCFF and look at multiples but don't value based on them. My strategies are top 20th percentile in 1, 3, 5, and 10 years, so it must work for them.
6th, when you reach ultimate prime ballin' alpha preftigious investor status, you can look across the capital structure and point out which part offers better value, or even better, have the conviction to pitch an idea where you're long one part of the capital structure and short another. It's a lot easier to value equity and ignore the various tranches of debt sitting above it, than to look at each piece of the puzzle as a potential winner or loser and make a risk weighted decision as to what part offers you the best risk/reward. These were the kinda guys picking up term loans at 2x EBITDA in the 2009 jizz fest.
My biggest issue with this report is the valuation metric. I want to use EV/S, but I feel like that is too general and there must be a more specific one. I presume that my valuation metric will lead to a metric because I will project a higher or lower value and input it into my valuation metric and it will spit out a new price target. Am I overthinking my valuation metric?
How is that "interesting" and relevant to what NewGuy said about capital structure? And please stop saying "metric".
I have no idea what your post has to do with mine that you quoted brother.
Capital structure = mix of debt and equity that a corporate has used to finance itself
As for your cool story, you need to be able to quantify it. Let your diligence guide you to reasonable assumptions on how both units will perform, then value the enterprise at a future terminal date, value the equity, and back out what your return would be if you invested today. Or more importantly, figure out what the maximum price you would pay for the equity is, and load up the truck if the current price offers you a sufficient margin of safety to your max price.
As I said earlier though, without a catalyst that will cause the market to reprice the security you're looking at, you're just punting on broscience.
The OP should be bitch slapped.
I'll say it "in real life", bitchtits.
Hey guys, I found this thread useful in preparing for an asset management firm analyst interview. Wanted to thank everyone because I got some good stuff out of it - including laughs.
I'm sorry, I only date men with real jobs =/
Ooof, not going well for the new guy
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