What's the best way to turn models received from sell-side to your own models faster and most efficiently?
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This is a great question. I’ve struggled with this for years, so let me share a few things.
The quick answer is to find one or two analysts that model in a way that you would build the model. You will want a full working model that isn’t a mess. One you can update in 10-15 mins for a boring quarter. That was always my approach to modeling on sell side. Hopefully a consistent assumption sheet exists that you can just change if not you might want to create one and link to it. My conversion process is simple. Audit model. Link assumptions to my own deck. Audit again then make changes.
I run a sector specific product so this should apply to a sector specific analyst.
Most important thing with this is getting to know all the analysts that you pay and understand who gets the largest commission. Things might need some tweaks with trading. Last thing you want to do is rely on an analysts models that you aren’t paying enough for.
Ultimately you are trying to understand how flexible the model is, how well it is made, and if you like it. I find that it only takes a few models to figure out if I like an analysts style. I look at top pick, bottom pick, random pick. It isn’t about whether you think the analysts assumptions are right but is this a model you can find what you are looking for? Can you easily change the assumptions? For oil and gas or anything with external inputs I want to be able to adjust those from my own deck of assumptions. If you need a walkthrough talk to the associate that built or maintains the models.
You notice the terrible models quickly.
Some analysts provide partial models to the buyside others the full working model. So make sure you know what you are getting, just ask the analyst or associate (unless it’s a firm policy as it relates to commission $s, I’ve only known one boutique Energy shop that does that). If you find small mistakes in the model don’t be a prick about it. Just fix it for yourself and ask an associate about it later. We’ve all been there before.
Let’s say you find two analysts with models you like. The next item is how much work do you need to do? Are you wanting to move their models into a tear sheet setup with model backups? Will you update their models quarterly (ie make it your own going forward)? Does you PM want models updated fast or can things wait for sell side to update? In which case how quickly does the analyst update their models?
Depending on how many seats you have with a firm, Bloomberg (and others) will take models and convert them - e.g. I’ve had a few analysts that have Capital IQ linked into their model. One was a shipping company with lots of formulas. Bloomberg took the model and updated everything to be compatible with Bloomberg API. I wouldn’t do this often but just in case.
Here is my process, and I’m without an associate right now so I do all this on my own.
Try to find a few analysts that model in a way that makes sense and are consistent with their approach across models. A good analyst uses a template for most companies.
Good luck.
This is the hedge fund forum, so perhaps the operative time horizons here are materially different than my own as more of an LT long-only, but in my opinion you really should build your own models without any outside influences. Once you have your own independent take on the company, then go in and compare with sell side models. Doing it this way allows you to see where you differ from consensus, and isn't that the whole point, to try and formulate a differentiated view if one exists (no value in being different for the sake of being different)? Personally, the only number from sell side that I compare is top line growth, but even that is often incomparable given I purely model organic growth and sell side estimates often include some kind of incremental addition to the top line from M&A.
I could see where if your shop is more short-term how leaning on sell side models could be applicable and have value, but in most cases I would recommend building your model independently before comparing with external models.
Ya I totally think it will be shop, PM, and time horizon dependent, but if you can do it I think it is well worth the effort and time. Additionally, once you get that initial model setup, maintenance over time becomes easier, it's just really that initial first time build out that is monotonous. Admittedly it probably takes me at least a full day just to get the historicals entered and make disclosure-based adjustments to get it the way I want it. In the scenario you laid out of 30-40 companies for a newer analyst with potentially a time constraint, I think the most value would be spent understanding the businesses themselves vs getting into the weeds of valuation, but as the analyst becomes more seasoned I would for sure recommend building out individual models independently.
Building off that point of becoming more seasoned, my personal coverage represents over 70 companies and I could realistically be expected to answer something about any of them to my PM; however, over time I have communicated a conviction list or a well-followed list of about 15 or so companies that I claim to have deeper and more up-to-date knowledge of. Now it will obviously depend on your PM as to whether they would be on board with you doing something like that, but this has worked well for me and resulted in a much better product when it comes to pitches and just on-going updates of my coverage. I would assume that most analysts cover businesses that are likely not worth owning absent a severe dislocation in pricing, and I would recommend at least trying this approach or asking if it is something your PM or team would be receptive to as a way to manage your workload and improve your research product.
Sechy62 makes a great point. Before you hit the model make sure you have some opinions on what you are looking at. Conviction list deserves more time then low conviction list. But remember, always challenge your assumptions.
Every PM will be different. Sometimes the strategy will guide the modeling - LO you might be more interested in direction and if your right (vs sell side and price target). Ie cf growth > peers, valuation discount. Shorter term focused might be looking at the quarter and positioning. Also could be both. This, and PM, could dictate whether you adapt model or create a new model.
kppw’s question is likely a problem many analysts face. When I was on sell side I covered around 25 companies. No associate just me. Buyside, whole different can of worms. Sell side launching coverage, average 2 weeks a company - to build a model (first one took longest and created the template for others), talk with IR and management then write initiation report. To be fair, I knew almost all the companies and sector. Depending on the buy side shop and the end game for modeling it could take less or more time.
Here is another thing I do, and I know others do this as well. Let’s say ABC is a company that I want to be extremely overweight or underweight the benchmark. If liquidity is low, position size high and volatility high more work is needed.
So it’s my big call, the kind of thing that if it goes wrong could blow up my product and / or put me on the hot seat to my finance committee and clients. This is a real world example and relates to a small cap equity that my firm took a large position in (largest we ever have in any one equity, but not large vs AUM.
I spent months going over company filings, regulatory filings, talking with people outside the company before I even built a model. When the numbers and story made sense I called management and got on plane to see them (high risk, company not at conferences so I went to them). Before I stepped into the stock I had about 100 page slide deck on the company, it’s project, assumptions, and everywhere it could go wrong. This is difference from building a model for models sake and doing a deep dive. But the model was only a small part of the buying process.
Another firm I know sent me a deck on a company they went heavy into (mid cap). Similar story. High conviction big bet equals a ton of time spent. They had a 75 page deck, and detailed model. It was solid.
If I could this will all stocks it would be great but not enough time in the year!
Anything else pales in comparison to this type of work. All other holdings have at least a detailed tear sheet; one page sheet that covers lots of key items about a company and the equity. It’s the reference sheet before management meetings or when deciding to tweak a position weight before the quarter.