How do you come up with a differentiated long pitch
I'm probably thinking about this the wrong way, and I'm absolutely open to being shown any incorrect assumption or jump in logic I've made but I can't currently understand how in the world an analyst can come up with a truly differentiated long stock pitch.
1. Assume management knows the most about their company, and by proxy the industry within which their company is situated and their competitors. They know more about this than other analysts out there as they've generally spent a lot of time in the industry spending often times years with the same company.
2. Management is always incentivized to portray their company in a positive light. That is, management of a public company will never deliberately attempt to demean or make their company seem less attractive from a valuation perspective.
3. Now, assume as an analyst you believe you have some differentiated long pitch. This differentiation can either come from considering something (an industry trend, some company specific characteristic etc...) that other analysts aren't considering.
4. Because management should know a lot more about the company, industry, and competitors than you do, they should know that as well, and if they do know whatever consideration/reasoning you know they would share it to increase enthusiasm around their company.
This is unlike a short pitch where even though management may know more than you they have no incentive to lay everything out easy for investors so they can come to the conclusion they should short the stock. So, I guess my question is what am I missing and where have a gone wrong.
Note that this also applies to private markets as well, especially if existing management is attempting to sell their business to a sponsor, as the incentive to upsell the business is even stronger.
There’s going to be a bull/bear debate on a stock and the stock price can be seen as a probability weighted expression of what investors are currently pricing across that spectrum.
Management providing optimistic guidance doesn’t automatically mean the stock will price that outcome more so than any other. You need to be differentiated to the market, not necessarily management themselves. If you’ve done work and think too much emphasis (in the stock price) is being placed on them missing numbers, then you’re generally going to be more bullish especially from a risk/reward pov. The extent at which that “guidance/commentary” is being priced into the stock will vary depending on the specific debate and sentiment etc.
Management can also just be pretty opaque on shorter term KPIs and quarterly guidance which stocks can trade on, so they might say they’ll do LSD growth on the full year and provide fuck all in terms of H1. Management will generally know more than you about the business, but isn’t necessarily going to be glued to the specific drivers around the stock in the next 3m.
Also management can be frequently conservative
Thanks for the answer. To summarize what you’ve said (to make sure I’ve understood your point) a long pitch doesn’t have to be differentiated from management or really the market, but rather should be more optimistic than street on earnings or some metric. I guess my question there is there is also some reasoning allowing you to come to this conclusion, and if this reasoning exists why wouldn’t management share it to all investors?
does that tie into the vagueness of management that you mentioned as well as them tending to be conservative?
Being different on the numbers should mean you’re differentiated to the market (presuming you’ve got a reason you’re at +3px price vs street flat) etc
The focal point is that even if management tells you the most optimistic case, the stock won’t necessarily then price that (because it’ll also be weighing more pessimistic cases as some investors are cautious/bearish etc) to varying extents.
Then there’s the the conservatism, poor transparency especially in the short term etc that will factor in the other circumstances
poeple get so insecure about being differentiated and end up lying to themselves/their pm and being intellectually dishonest. you don't need to be hyper differentiated to make $. just need to be right. best pitches are concise and simple
crowding isn't a bad thing...
Precisely. Not supposed to spend 99% of your time forcing differentiation on longs. Spend that time on shorts. Longs aren't hard to find.
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