Marketing Investment Theses
Quick question for people in ER. Disregarding the lack of emphasis that the buy-side places on your opinions, how do you go about coming up with and marketing investment theses? If I were interviewing for a specific fund or something I would make sure my pitch was relevant to the fund's strategy, but on the sell-side you may have clients with very different philosophies (e.g. shorter/longer time horizons, growth vs. value, etc.). Could anyone share their experience?
since I use SS research I'll chime in. I don't care if it's applicable to my strategy, I'll decide that. What I want for you to do is to tell me your conclusion (OW/UW), explain your rationale and then tell me your conclusion again.
something like: recommend XYZ OW at current price...long explanation & #'s explaining/justifying why...this is why we recommend XYZ OW over its peers (then show the peers).
that's what works for me
Thanks for the response. I'm about to start in ER so I'm just trying to get a sense of how these things are usually framed. Can I ask what rationales you typically see (to the extent you can)? e.g. do you see any of the following especially often?
-Based on beating/missing quarterly earnings -Based on beating/missing annual earnings -Based on multi-year forecast vs. consensus -Relative value vs. absolute (from what I've seen relative is more commonly conveyed in reports even if a DCF is used to back it up)
I realize it's a pretty vague question that's hard to generalize...anyone else have any ideas?
first, you wouldn't ever be this detailed unless you were initiating coverage (SS) or presenting a pitch for a new holding (if on buy side), most of your reports would be updates on company events, that's it.
my BB (like most probably) looks at 1-2 years out, that's it. as a PM, I look for much longer holding periods, but that's about how long I allow for a thesis to take hold or crap out, so it's not about multi year analysis.
beating/missing earnings doesn't play into the picture because every firm guesses their own earnings figures and bases their recommendations off of that. now when the company actually reports, they may adjust their thesis based on whether or not the company reported earnings materially different from what the SS firm expected, but that doesn't play a part in recommendations.
relative value is tough, because I wish they did this. S&P Capital IQ will show you a list of comps at the end of their reports, but few (at least my BB) firms actually talk about relative value vs. competitors when they initiate coverage. sure they talk about competitors when they talk about market position, etc., but not from a valuation perspective.
the rationale will depend on philosophy. most BBs' ER departments have a fundamental tilt, with some analysts being growth/value, and others being agnostic, but you will rarely see technicals in an investment pitch/initiation of coverage (why train them in accounting if you don't have them look at fundamentals?). I'll give you a few examples, but the short answer is the SS firm things the company in question will grow their earnings such that shareholders get a handsome positive return from the stock price increasing (this is if they recommend OW). if EW, return will be neutral to positive relative to the market. UW usually means sell, better opportunities elsewhere.
when you're talking about 1-2 year time frames, you're not talking about Warren Buffett type stocks that create value over decades and decades, you're talking about a catalyst, either internal or external. an example of an external catalyst for a company like WMB might be the completion of the Keystone pipeline (if it ever happens), an example of an internal catalyst might be a new product launch or drug approval. it will vary from industry to industry, but basically the reason SS analysts would say "you need to buy this NOW" are because some factors exist in the company that are (in their mind) currently un/under appreciated by the market such that you can profit from it.
if I had the luxury of having my own analysts, I'd tell them to do a Porter's 5 forces analysis, tell me how the company is valued based on a few metrics I like, tell me the risks to their thesis, and what the final conclusion was (& obviously justify it).
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