How do you go about modelling a company on the buy side?

Prospective Monkey here. I have seen several sell-side models but never come across a buy-side model here.

Wondering how do you go about modelling a company and how do you get confidence into where the company is heading 2-3 years from now? Is the process more top-down or bottom-up?

Would love to hear how you do this?

P.S. This question is not meant for short-duration HF guys trading into names every quarter

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Comments (14)

  • Research Analyst in HF - Other
Aug 28, 2020 - 1:38am

Concur. It's cute that you think that there's something special to buyside models but it's all the same shit mostly. A lot of times the sellside models can be even more detailed than buyside ones depending on how deep the coverage is on either end.

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  • Analyst 2 in HF - EquityHedge
Aug 28, 2020 - 7:34am

Sell side models = very complicated and usually very wrong, hard to update. Buyside models = all the straightforward drivers are modeled and the analyst has a very good understanding of the levers of value creation (buyback, costs, components of growth). Every great model is simple enough that a PM could go in and understand what's going on (excl some complex industries). Because if you need to spend too much time explaining it to your PM, probably not worth buying 

Aug 28, 2020 - 8:17am

Buy-side models are built to stress test specific metrics and outcomes yielding a set of valuation ranges and defined risk-reward profiles. Sellside models are not set up that way and tend to be standard 3 statements without highlighting key drivers of a company. Likely no scenario analysis and if there is it's usually your standard scenario toggles on different, usually not meaningful metrics like gross/operating margin without the underlying build-out. In summary, the main differences are setting up risk rewards and understanding the trading range of a stock driven toggled by specific drivers.

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Aug 29, 2020 - 4:24am

Hi, thanks for this comment. Could you expand a bit more on what you mean by the underlying build-out that you refer to? Any chance you could give an example? Sorry if the question is naive, I''m relatively new to this so just trying to understand better. Cheers.

  • Research Analyst in HF - Other
Aug 28, 2020 - 8:41pm

How are you getting all that competitive landscape and supply chain info to flow down into the P&L? Hard to get that sort of granular info and be accurate without the internal company models besides specific companies with only a couple players in the chain giving you clear readthroughs/ readacross. I feel like that's garbage in garbage out if you get too granular.

Aug 28, 2020 - 9:51pm

For example, I don't think our job is to update on a periodic basis a range of prices that are in a bill of goods for a component. That was not what I meant when saying building in competitive landscapes and supply chains into a company-specific model. In the end, It's about isolating key drivers that are likely to flow through and have a meaningful change to a company or set of companies. If after some work this factor or set of factors (normally no more than 2 or 3) can't be isolated to support a view on a stock/company, then it's a lemon and time to move on to the next idea.

The whole point of the model is to be able to justify or invalidate a stock's valuation at a given point in time and result in an action on the portfolio level.  Definitely don't recommend getting lost in the woods and start building out irrelevant metrics just for the sake of granularity.  Building out a complex model that is in accordance with whatever the common format is also pointless if it's not simple enough to understand and tweak.  The sell-side models serve mainly as reference points to what the current market consensus is and the function of the buy-side analyst is to understand what the market still hasn't priced into the stock and what needs to happen for that price to converge with our intrinsic value.   

Aug 28, 2020 - 6:09pm

I'll add a lot also depends on strategy, your PM's style, the individual company and sometimes how large or directional vs. rel val a position is. Generally though you want to have an appropriate level of granularity around revenue, costs and OPEX builds that is still simple enough to easily test assumptions around should things be trading quickly and easy enough that a PM could jump in the model and figure out how to stress test things quickly without your help. For some companies even if we have things like warehouse and corporate employee salary builds it's still really clear what's going on and how to easily stress test.

Aug 29, 2020 - 12:08am

Why not just models? Sellside gets a lot of hate all around. Big surprises lol. 

My instagram account was built around this topic (shameless plug)

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

Aug 29, 2020 - 12:12am

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