Can't consensus be correct?
As far as I understand, the HF industry is based on the premise that the street values a stock in a manner that is incorrect and thus as a hedge fund analyst through deep research (which a common man wouldn't do) you can figure out what the street is missing and take the required l/s position.
I am stuck at a case study rn - given a stock and am supposed to give a long/short recommendation. After reading the fillings and a few sell-side reports I genuinely think that it is fairly valued and the differentiated view I can think of is something that is forced rather than being true...
Am I just being lazy and there is definitely something in the stock that the street/sell-side is missing or the market's understanding of that stock might be correct in some cases?
I don't think it will be relevant to mention the consensus of the reports made on the company. What would matter most is how you can reinforce your opinion on the company.
It may not be the case that you've been given this company to study and that your opinion should be inverse to that of the reports.
I'd say keep going as you are, study the company and exhaust all angles to determine whether it's a long or short and add in a critical analysis of your opinion e.g., if it's appropriate to invest long, what are things that you should look out for anyway "just in case"?
Once you've made up your mind in determining whether it's a long or a short, give reasoning to back it up. Sounds like they just want to test your ability to understand what type of investment will give better returns, why you arrived at that conclusion, and what factors you should consider in a prudent manner.
Got it thanks!
No worries, mate. If you have any other Qs just shout
I'll let others chime in here since I don't work at a pod, but my best guess is to put yourself into the role of an analyst at a pod (assuming its a pod interview).
You are assigned coverage, and the PM says, what do you think of this stock? You always need to have a view of what is going to happen over the next quarter to year, to next year. Sometimes, it can end up as "risk/reward is not advantageous today, but within these range is where I would press the bet", and then reinforce whether you picked long or short.
So this may sound like: "key drivers of the story are likely to have momentum through year end, and I am 5%-7% over EPS through year end, but in-line thereafter. The stock already trades in the higher end of its range and peers (reflecting this strength), and without materially higher results or a new inflection, there is little left that will push 2025/2026 numbers higher. I am short this set up on a relative basis, but the risk/reward for this trade is not that advantaged. I would be a bigger short if the stock gets to the xyz range. My catalyst is an in-line guidance on FY25, which reflects a slowdown in the beat and raise path.
I just tried making a fuzzy situation up, so hey maybe someone would say you're long this kind of stock until xyz date!
Tougher with assigned stocks, where the likelihood that it is within some band of fair value or the risk/reward is already balanced, vs. finding something new for a more specific reason.
Thanks! Appreciate the help!
Of course, being "contrarian" on everything is retarded. From 10 stocks, you may find only 1 that you think people miss something - for the other 9 it's a buy.
Here’s my advice for recruiting pitches (before you’ve actually had time on the job). This is much different than my advice for actual pitches. Anyway:
If you picked the stock, it’s unacceptable to have no variant view
If it was assigned to you, in most cases it should be one that the interviewer knows well and often has some ‘angle’ in mind they want to see if you pick up on
in some cases you’re assigned a name with little forethought and it’s simply a well covered and fairly valued name - this sucks
here’s what you don’t want to do regardless: regurgitate sell side view/reasoning/price-target
”but what if they’re right?”
the case is to check how you think & if you can model/write/present, you’re better off honestly being on the ‘wrong’ side (within reason) and demonstrating some creative or thoughtful supporting reasoning and research
Here’s your cop out:
- have a bull/bear/base case & assign probabilities; aside from always being a good way to pitch, it allows you to be noncommittal & if you sense the interviewer has the opposite view - hey! You already are prepared to show you are aware of that view, understand it & can address some questions on it
- always call out your “next steps to build conviction” with what sort of research you’d do and data you’d use to further home your probabilities. (1) this is actually the job, so it’s good to show you get that (2) this reminds the interviewers, who sometimes forget, that you don’t have Bloomberg/sell-side/mgmt access & existing knowledge)
You’re trying to have them leave the meeting saying: he’s trainable, he can present fairly well, he could make a real pitch.
You’re trying to avoid them thinking: “well he came in all bullish, didn’t even pick up on the [bad thing] we hoped he’d find, tried to argue for a side that seemingly came from rewording sell side & didn’t seem to have given much thought to the alternative views”
cases suck, good luck
Thank you for the detailed response. Couple of questions:-
1) I know this is a naive one but in terms of resources for case studies - I think 10-K's, Q's, Press releases, CapIQ/Bloomberg, Brute force Google searches and some sell-side reports (if possible). At an actual fund you'd probably have additional resources such as access to the management, analysts covering the stock,some prop data through channel checks - and that's it - are there any resources I am missing?
2) You said your advice would be significantly different for actual pitches. I think both myself and the forum would appreciate it if you could throw some light on what would that entail. Thank you so much!
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