L/S Hedge fund case study
Hi all,
I have received a take-home case study for a potential job at an L/S Hedge fund. I believe the stock would make a really good short case; the company has struggled with slowing revenues, low margins and decreasing profits. To company has taken on a lot of debt that is due on a very short time and is a lot more leveraged than its competitors.
On top of that the company is using some questionable accounting practices and I am pretty sure they are overstating revenues through an aggressive method of revenue recognition. Accounts receivables are rising way faster than sales and the company is struggling to convert profits to cash. Also Accrued income is rising rapidly.
Any tips on what to further look at when building the short case? The fund asked me to come up with a 3 year IRR. Any tips of how to arrive at a stock price ranges in three years’ time and calculating the IRR for that?
I have calculated a decline in sales due to the aggressive revenue recognition and the fact that IFRS 15 kicks in in 2018. Then I have used reasonable margins to arrive at future EBITDA and net profits. My thought was to just use competitor/industry multiples on my projected future financials and then arrive at a reasonable stock price in three years’ time, then calculating the negative IRR for the investment.
Thanks!
i agree with your 3yr irr methodology. For coming up with additional materials, I would build a case on what consensus thinks is going to happen in the next quarter or year and then show how your analysis is different from consensus. Go on bloomberg and get a % of buys vs holds and hopefully build an asymmetric risk return profile. Do a multiples analysis and then a 5 yr DCF for valuations and highlight the qualitative downfalls of the company.
Thanks for the reply!
I wont to arrive at a pretty clear indicative share price in three years time. Due to my analysis netting both negative EBITDA and negative earnings in the near future, how should i go forward with arriving at a reasonable future price per share?
Do you see this company going into distress? It sounds like you're basically cash flow negative across the forecast period. If that's the case and you see that the company will go into a restructuring/liquidation, your share price will go to zero anyway and hence you can calculate the theoretical IRR for your short.
L/S Equity Case Study (Originally Posted: 03/11/2008)
what to expect in a typical case study for a l/s equity fund? how to approach? would love to get some info from ppl who have been in the process; i think everyone would benefit. thanks in advance!
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