Which sector coverage would you choose and why?

Hi guys,

For those of you that do ER: What would be your favorite sector coverage and why?

Since I am a finance student, I don´t really offer any specific industry insights or knowledge. But I would go for Tech, because this area was growing strongly over the last couple of years and seems to keep outperforming other industries in the future given its increasing importance in our life. Besides that PM´s are more interested in them as well. (Apple, FB, Google etc. which are also driving the S&P500). Is this the right approach to decide which sector to cover or not?

In general, what are things you have to watch out for when it comes to choosing a certain area/sector besides being passionate about it?

Thanks for your insights.

 

Tech is very broad. Pretty much everything gets thrown into being tech these days...but in reality there are tons of different tech sectors such as internet, semiconductors, fintech, software, telecoms, etc.

I think the biggest factor of what to decide which sector is think about what you want to do in 20 years. In equity research you are looked at as an expert. You study a group of 20 stocks in a defined sector and are expected to know pretty much everything about them. Really you are developing an expertise in an area that can be leveraged later in life. For example, if you want to maybe be the CFO of an energy company one day, try and get an energy analyst position.

All industries are very different in how you look at them, model them, value them, etc.

 

Thanks for your response. I want to stay in finance if possible, so I don´t really have a certain preference.

What about covering the financial sector (banks)? Wouldn´t that allow you to build a strong network on Wall Street?

Don´t say this in a banking interview: Which superhero would you be and why? I want to be like Robin Hood, stealing from the rich and giving to the poor - me.
 

Unless you have experience in FIG and know that you want to stay in it, I would not recommend it. You become very pigeon holed and have a completely different mindset when it comes to financial analysis (interest expense is your version of COGs...let that sink in for a bit).

You do build a unique (not bigger) network across other financial institutions, but my unsupported observation on this is that it basically makes you have a complete unhedged career. When shit hits the fan and financial services firms are laying off people left and right, your network won't be able to help you as much. On the other hand, if you have tons of industry contacts in tech/industrial/services/etc, you may be able to segue into a corp fin or bus dev role.

 

While you can have a preference for a sector it's extremely difficult to secure an ER job. The requirements of the job are pretty standard across any sector you cover (my opinion), only difference is the sector expertise you develop. If you are dead set on tech then I'd either try to get an industry job and lateral in. One guy I spoke to in tech ER flat out told me only hires ex software sales guys as associates

 

When I was going through the interview process, there would always be industry people in the mix.

Depending on the technicality of your sector, it is extremely advantageous to hire someone who already knows the industry. Some may not agree (and it widely depends on your sector) but the finance part is probably the easiest part of the job - its understanding the industry that takes years.

 

Yep, exactly. Differentiation in investment theses to institutional investors is more borne out of an understanding of the nuances of the industry than anything extraordinary with the financial modeling.

Having said that, some analysts just want their associates to be model monkeys. I'd personally avoid those seats if possible unless you really want to do corporate finance perhaps.

 

In addition to secular growth and passion, industries with esoteric qualities would be something else I would consider.

For example, I have a tough time distinguishing between software providers. Take cyber-security, how the hell do I know if PANW/FEYE/FTNT/etc. really have some sort of sustained competitive advantage. I never use the stuff and will never have enough hours to truly understand the differences. I can see the numbers they post and extrapolate trends, but that did not help PANW last Q. A really plugged-in sell-side guy may have gotten me out of the name before the print. That is valuable.

I would put semis, fintech and payment companies in this category. The entire materials sector is fairly esoteric, dealing with so many different commodity supply chains and there can be a lot of movement in stocks when they hit a favorable supply/demand dynamic. Healthcare also comes to mind. Pharma/biotech requires unique insight and med-tech as well. Industrials are a bit more understandable but there are plenty of nuances there as well (defense is boring though).

I would avoid utilities like the plague, so boring and no differentiation. I feel pretty similarly about REITs and Financials. Most of the companies in those sectors trade on macro factors. Am I biased to higher rates or not? Do I overweight banks, brokers, asset managers, insurance, something else? If a sell-side guy could help me with that it would be great but most are stuck within those discrete industries. Telecom is probably also in the boring group although recent M&A has made it more interesting.

Staples are better than the previous paragraph but also pretty boring and definitely lack esoteric qualities. Discretionary has more interesting niches but buy-side guys are going to feel more confident about making decisions on retailers/media/autos/hotels/etc. without your consultation (rightly or wrongly) because they are familiar with the products/services.

Energy is driven so much by commodity prices. I think you will always have interest there but I am not sure how much value an analyst really adds. I would pay for M&A expertise in energy.

 
wso23:

In addition to secular growth and passion, industries with esoteric qualities would be something else I would consider.

For example, I have a tough time distinguishing between software providers. Take cyber-security, how the hell do I know if PANW/FEYE/FTNT/etc. really have some sort of sustained competitive advantage. I never use the stuff and will never have enough hours to truly understand the differences. I can see the numbers they post and extrapolate trends, but that did not help PANW last Q. A really plugged-in sell-side guy may have gotten me out of the name before the print. That is valuable.

I would put semis, fintech and payment companies in this category. The entire materials sector is fairly esoteric, dealing with so many different commodity supply chains and there can be a lot of movement in stocks when they hit a favorable supply/demand dynamic. Healthcare also comes to mind. Pharma/biotech requires unique insight and med-tech as well. Industrials are a bit more understandable but there are plenty of nuances there as well (defense is boring though).

I would avoid utilities like the plague, so boring and no differentiation. I feel pretty similarly about REITs and Financials. Most of the companies in those sectors trade on macro factors. Am I biased to higher rates or not? Do I overweight banks, brokers, asset managers, insurance, something else? If a sell-side guy could help me with that it would be great but most are stuck within those discrete industries. Telecom is probably also in the boring group although recent M&A has made it more interesting.

Staples are better than the previous paragraph but also pretty boring and definitely lack esoteric qualities. Discretionary has more interesting niches but buy-side guys are going to feel more confident about making decisions on retailers/media/autos/hotels/etc. without your consultation (rightly or wrongly) because they are familiar with the products/services.

Energy is driven so much by commodity prices. I think you will always have interest there but I am not sure how much value an analyst really adds. I would pay for M&A expertise in energy.

What about covering mortgage REITs to eventually lateral into MBS for fixed income? This was my thought given the macro focus you touched on.

 

I guess why not? MBS as in managing fixed income portfolios, or more frequent trading of some sort? Honestly I don't much about how MBS are managed within portfolios. I know that we have allocations in a couple of our FI strategies. Are there MBS-only funds out there? Maybe probably?

If you are talking about managing RMBS/CMBS and CDO-like stuff, I believe that is more technical. What does this tranche entitle me to and what are the characteristics of the mortgages within.

But sure if you want to cover mortgage REITs it is going to be esoteric stuff to equity guys and any insight you can provide on what the REIT actually holds will be valuable. Even then I feel like you will be splitting hairs though. Most of the time all that will matter is your view on rates?

 

Good one. Can you please discuss Utilities more? I find its economic fundamentals interesting, regulation plays a bit part, and once a Utilities co has branched out internationally (which the European ones have done with, say, Latam, for example) it can get complex. How would you view Utilities in terms of transferability to Investor Relations/Business Development/Strategy on the corporate side, or to funds on the buy side?

The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.
 

Any industry that you cover probably has good transferability to IR/Corporate. As to the buy side, I would view a utilities analyst as one of the least desirable guys to hire. It is 3% of my index (US) and not sure there is a lot of upside to take advantage of. That said, I would consider anyone with sell-side pedigree, so you have that going for you.

 

Whatever you do, be sure to emphasize the fact that you are flexible. Given the state of our economy the old saying "Beggars can’t be choosers" is most prevalent. You never know how your interviewer will react. If, for example, he is an industrials banker and all you do, with a stupid awestruck expression and high school girl grin, is discuss how you always wanted to execute Tech M&A deals, then you might psss him off.

 

I said something along the lines of "I am very flexible; honestly, I am more concerned about getting a job than picking the coverage group I want to work under." [with less emphasis on "I need a job" and more emphasis on "I am very flexible"]

His response was basically "okay............ but for future reference, it is very important to have a solid answer to this question for interviews."

I was worried that if I said "ya, M&A, duh, what do you think?" he would think that I was arrogant or something -- and other than M&A or Lev Fin or something, I can't imagine being passionate about which group I end up in, especially as an undergrad with no genuine exposure to any of them.

 

above responses "just say youre down for whatever" are actually quite bad advice. Also this is not an "asshole" question but very standard

you need to have prepared at least 1 industry group and 1 product group (M&A is probably the best) as well

Then you need to have a very clear reason why you picked that group. could be you liked some guys you met there. could be you are excited about the industry because of some reason. whatever.

Then, you need to be able to speak intelligently about some trend in the industry and a recent deal would be great too

This is a common question and you should be prepared with a highly specific, detailed answer

 
deal_mkr:
above responses "just say youre down for whatever" are actually quite bad advice. Also this is not an "asshole" question but very standard

you need to have prepared at least 1 industry group and 1 product group (M&A is probably the best) as well

Then you need to have a very clear reason why you picked that group. could be you liked some guys you met there. could be you are excited about the industry because of some reason. whatever.

Then, you need to be able to speak intelligently about some trend in the industry and a recent deal would be great too

This is a common question and you should be prepared with a highly specific, detailed answer

deal_mkr is right about this... it isn't an asshole question but a question that's designed to tell me as an interviewer whether or not you've done your research or if you're just some kid who likes the idea of banking and loves to troll internet forums ranking groups. We know that a high percentage of kids think they want to do M&A but I bet none of you have any fucking clue? Why? Because you HAVEN'T done it yet. There's no way you can absolutely know that you'll like M&A more than working in a coverage group. This question allows me to see who out of the candidate pool can give a cogent, mature answer. If someone says to me, "One thing that appeals to me about M&A is the opportunity to be working on deals in multiple industries. I have had a small amount of exposure to the valuation process in a basic sense, but I think it would be interesting to see how valuation approaches vary from industry to industry" I would think that's a good answer. If someone says "I want to work in M&A because I want to do deals and I don't want to pitch." I would know this kid doesn't know what he's talking about because our M&A team pitches quite frequently, and when I work with our M&A team, I handle all the modeling and they provide supplementary support on things like WACC analysis and competitive landscape. So if they automatically assume that M&A is better than industry coverage without having a strong reason that makes sense, it shows me that they haven't done their research and probably aren't an ideal fit. Additionally, if I have a kid who says "My dad works in the oil and gas industry, and so does me older brother. I grew up around oil and I can tell you the 3 or 4 best operators in this shale play, and talk to you about the drilling process, I just love energy and I want to work in this industry" then that kid has a legitimate interest in a coverage vertical and I know it isn't bs. The bottom line is that this question gauges authenticity and enthusiasm. It's ok to not know which one you prefer, and if that's the case just explain that you understand the merits of a coverage group and a product group and explain why you would be leaning towards one or the other at this point in time, but stress that you are flexible. No one can judge you for not knowing that you want to commit to one industry or all industries at 21-22 years old. I still don't even know which I prefer and I work in an industry group, but I see things that really appeal to me about my friends who work in a product group. Stay flexible and humble and you'll be fine.

 

I think they want something to go off of. If you've networked with people in a certain group, have some interest or experience in an industry or product, giving the bank some direction on this is a huge help. Obviously rigidity isn't going to be an asset, but directionless could be equally as poor an answer. Give a bit of structure to help them imagine where to place you or where you might like to be, but underline with the fact that you're willing to go wherever the firm needs you.

 
ensalada:
I was worried that if I said "ya, M&A, duh, what do you think?" he would think that I was arrogant or something -- and other than M&A or Lev Fin or something, I can't imagine being passionate about which group I end up in, especially as an undergrad with no genuine exposure to any of them.

It's not what group you say as much as it's that you've put thought into your answer and are interested for specific reasons. Obviously if you say "I want to do M&A because I've seen Wall Street 902389309331 times and I want to be a BSD" that's going to rub him the wrong way. If you speak about M&A or Lev Fin and support your answer with sound reasoning, you'll be fine.

I said basically the same thing in a mock with a BB associate and he gave me the same feedback. Since then, I have been forming my answer to this along the lines of "Well as of right now, X Group has interested me for A, B, and C reasons. However, let me be clear that I would love to work in any group. I am most interested in working here at Company Q."

If you have networked with anyone in the group or are just interested in it this is where you show your interest/talk about a trend in the industry that lets the guy know you know what you're talking about.

OP, from what I understand interviewers are looking for kind of a happy medium between what you said and "if I don't get TMT/M&A I'm going to blow up the office." You want to come off as having put thought into what kind of work you would want to do, but also let them know that it's the opportunity to work for their company that really interests you.

MM IB -> Corporate Development -> Strategic Finance
 

For VC obviously tech (and to some extent consumer) are where all the action is. For PE there will be opportunities everywhere, and tech might actually be a bit crowded. If you were thinking public markets I'd encourage you to choose industrials or consumer (tech and energy are always crowded for public markets analysts, while there are fewer financials spots).

Overall, I would focus on choosing what you personally enjoy - there will be solid opportunities everywhere.

 
Best Response

Putting aside the PE/VC ambition, which is a pretty big career switch, you should consider the relative importance of the industries you're considering within the index or indicies you benchmark against. For example, if you were benchmarking against the MSCI emerging market equity index the biggest industries would be financials (~25%), tech (~25%), and consumer (~20%). Conversely, utilities and real estate are pretty small at 3% of the index each.

I would pick something that would give you a lot of exposure and flexibility. This will serve you well later in your career particularly if you ever aspire to become a PM.

 
models_and_bottles:

Putting aside the PE/VC ambition, which is a pretty big career switch, you should consider the relative importance of the industries you're considering within the index or indicies you benchmark against. For example, if you were benchmarking against the MSCI emerging market equity index the biggest industries would be financials (~25%), tech (~25%), and consumer (~20%). Conversely, utilities and real estate are pretty small at 3% of the index each.

I would pick something that would give you a lot of exposure and flexibility. This will serve you well later in your career particularly if you ever aspire to become a PM.

Right on the money. Whatever models_and_bottles said. +SB

 

I've talked to alumni + my connections about this extensively recently as I had to rank my sector preferences for my upcoming summer BB ER internship. There's a lot more to think about outside of what you find "interesting."

Basically, you are trying to decide if you want to work under someone who has been in the industry for years, has an established franchise, is II ranked, etc OR you want to choose someone new because they are starting to develop their franchise and might give you more meaningful work. Personally, I choose the first category because I want to know what it takes to be on a highly ranked team. To each his own I suppose.

You should also think about avoiding highly efficient large-cap stuff that tons of analysts cover (i.e. Apple, large cap biotechs, etc). Interns like us won't really be able to add any value to the "sexy" sectors. Therefore, I preferred analysts that were covering small/mid cap stocks or highly niche/technical sectors (it was explained to me that if, for example, you cover a complicated financials sector you can add value by just being able to explain to buy side folks WTF is going on so that way you don't need to rely on being a superstar stockpicker). I think covering less liquid/less efficient areas would also make me more attractive to hedge funds/buy siders.

Another aspect to focus on is the background experience of the person that you would work under. My top choice had all of the above I mentioned + he previously worked at a hedge fund (so he will know how buy siders think). I hope I get the sector I want this summer! Best of luck OP!

 
stormy54:

You should also think about avoiding highly efficient large-cap stuff that tons of analysts cover (i.e. Apple, large cap biotechs, etc). Interns like us won't really be able to add any value to the "sexy" sectors. Therefore, I preferred analysts that were covering small/mid cap stocks or highly niche/technical sectors (it was explained to me that if, for example, you cover a complicated financials sector you can add value by just being able to explain to buy side folks WTF is going on so that way you don't need to rely on being a superstar stockpicker). I think covering less liquid/less efficient areas would also make me more attractive to hedge funds/buy siders.

Another aspect to focus on is the background experience of the person that you would work under. My top choice had all of the above I mentioned + he previously worked at a hedge fund (so he will know how buy siders think). I hope I get the sector I want this summer! Best of luck OP!

Disagree on the highly technical sector for an internship. If you are an intern and know nothing about financials...it is unlikely that you will actually have a handle on it by the end of your summer. And you certainly won't be talking to clients during the summer. Something to remember is that the team you intern with may not be the one you join if you do get/accept a full time offer.

Also, top ranked analysts GENERALLY are very particular about their work/work process and GENERALLY have bigger teams. Therefore I would probably not recommend choosing a top ranked analyst for an internship. It is likely that you just end up with grunt work that has little meaning, or you just don't have any work at all. The younger guys who have not had their own coverage that long tend to be more likely to throw interns right into the mix...but YMMV.

 

Assuming you got UMass considering your username.. I know a handful of kids each year go into IB from the business school and you seem to have a pretty solid resume. The sector that you have the best shot at might be what you're interested in most, as you will naturally put In more effort to attain that goal.

 

If you got some quantitative chops, I would suggest risk management. Huge growth, if we get some Dem's or Progressives in office compliance and risk will be even more paramount than it is now.

Just an area to check out.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
 

Do you have a 2nd cousin or distant uncle in O&G? I only ask because you said oklahoma. It's really the only industry worth a shit that is there (that I am aware of, feel free to prove me wrong).

look into the oil and gas industry, it has extremely nepotistic hiring practices features, work on figuratively blowing your manager/owner of the company and you just might make it.

 

Small cap and micro cap stocks are always fun, especially because they are often overlooked by analysts and sometimes do have price discrepancies

"One should recognize reality even when one doesn't like it, indeed, especially when one doesn't like it." - Charlie Munger
 

At the top 5 colleges, the best students usually go into stem Phd, med school, yale law, prestigious fellowships such as rhodes/marshall, and if they get a job afterwards, it's usually quant hedge funds (de shaw/two sigma/citadel/aqr), MBB consulting, or tech.

 
ltohang:
MBB consulting now more prestigious than IB?

MBB consulting has always been more selective than IB. It's really tough to get coming straight out of college. If you're sure you want to do finance, you should take a good IB group, but MBB gives one more exit options and transferable skillsets.

 
BlackHat:

Auto suppliers, enterprise IT, those cheesy down-and-out banks, and aerospace

I'll add that homebuilders have spiked, as have housing derivatives (e.g. mortgage insurers). A good chunk of the upside has been realized, but a lot of funds still are invested. There are still values in the space.

FinTech / Services have continued to run, as have telecom "tower" stocks, though I don't think either are considered "hot". Media companies (CBS, TWC, AMCX, SNI, etc) have also done very well.

Some of the brokers/asset managers rallied late last year, but have cooled. Other financials (e.g. Insurance) have performed well, but that's more a rebound from low post-crisis valuations.

 

This is too broad of a question, there is no sector that is better than the other. All have strengths and weaknesses. You should trade sectors you have the most knowledge about, and more specifically the ones you find the best opportunities in. Everything else depends on your trading strategy.

 

Unless you are planning on being a career banker, the industry you choose to spend your analyst years covering will not matter as much as the bank and the group's reputation will. The skillset gained during your analyst years (modeling, critical thinking, attention to detail, etc.) are transferable and will not differ much across coverage groups. So, unless you are dying to become an associate at JC Flowers (FIG PE), for example, I would go for the industry group with the best reputation and the one where you fit in the best.

 

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