How often do you have a truly differentiated view that no one talks about?

All the large cap names are well studied - it seems tough to consistently come up with a truly differentiated point of view about something that no one has thought of, especially if it's regarding a key driver for the stock. Often I see it more as that there's a well understood bull case and bear case and you do the work to validate either. Or am I just an analyst with weak/mediocre ideas? Interested to get a sense from other HF folks what your experience is like. 

Comments (50)

Jul 3, 2021 - 11:05pm

a lot of large cap stocks/ideas are really crowded. For a company to get a truly differentiated view that your question asks you need to have a different perspective which is hard or be early. prime example of that is tiger global allocating more time/funds to the vc space, digging for the next 100 bagger company/stock .

Jul 4, 2021 - 12:11am

Agree with most points. The part about HF not moving to the vc space might be the emphasis on the public markets rather than angel/startup investing which also has a low success percentage. But what do I know just graduated high school too lol. Also most of these newspapers have a high percentage of just noise and nothing really concrete/insightful in my opinion.

Jul 4, 2021 - 2:48pm

It does not happen that often but when it happens, it can drive material excess returns. It can come from multiple places - looking at data in a different way, a news article on some part of the company, an industry event, a helpful meeting with the company where you ask about a project they're super excited about and sometimes it can be as simple as modelling the quarters and realising that consensus is just miles too high or too low. It sadly often just comes down to doing the reps and learning the patterns to look for. 

  • Associate 1 in PE - LBOs
Jul 4, 2021 - 8:04pm

People have been telling me for over a year that GameStop is just a meme, so seeing the moves they've been making and the money raised is pretty damn satisfying. 

Most Helpful
Jul 5, 2021 - 12:30am

Happens way more than you think. There is a ton of groupthink in this industry and you'd be surprised how little people actually try to be differentiated, whether the name is well covered or not. Examples can include:

  1. You connect dots faster than others, e.g. you saw freight inflation creeping up in 2017/2018 and started shorting names with high exposure before others caught on (or even more recently, I remember you had a week or two after we got COVID in the US to buy CLX before it really started moving)
  2. You are more of an independent thinker, e.g. mkt thinking certain companies were going to go bk in 2020 due to COVID, you ran cash flow analysis and found it highly unlikely and found R/R very favorable
  3. There is a well defined bull and bear case but you have a different view of probabilities than is currently ascribed by the market, e.g. market thinks bull/bear is 50/50 but you think it's 80/20, giving you an attractive R/R
  4. time arb, e.g. quality company might have tough compares, leading to reduced buying and giving you a chance to buy a quality name at a discount (most recently Ackman's investment in DPZ comes to mind)

Could go on and on but you get the general idea. Should read some Howard Marks, a lot of his thoughts around "second level thinking" are relevant here.

Jul 6, 2021 - 6:11am

Amazon and Apple are covered by the whole street (+20 analysts) yet have been consistently miss-priced and provided fantastic gains for equity investors. Amazon has pretty much doubled from March of last year. I don't buy that you need to focus on no-name unknown small caps to come up with differentiated views.

  • 3
Jul 8, 2021 - 7:00pm

Street forecasts what is the art of the possible right. To truly value Amazon, you need to understand that it is a platform asset with the ambitions of Zeus. Nobody is putting this in their DCF, they're just saying TAM of commerce is $X based on Bain study and market share and adoption is y% based on market studies etc.

They probably missed that Amazon would get into grocery, start selling software etc. Can you imagine a sell side analyst, when MSFT was selling PC hardware, to come out and say "I think they'll invent this cloud product and make it a multi $bn biz? No chance in hell. Group think is cancerous and it's my opportunity to eat your lunch

Jul 6, 2021 - 6:50am

You will only know if you view is differentiated after the fact, there is no value in being contrarian for the sake of being able to say you are contrarian. To really come up with a differentiated view, you must first form a view independently, and then second figure out what the consensus view is. 

How differentiated your view is will also depend on how differentiated your time horizon is. In my opinion, a name with a lot of sell side coverage quickly tells me that this is a stock that is good for generating commissions, or in other words, there are a lot of investors in the stock with short-term horizons/concerns. Thus, what is driving the stock in the next 1-2 Q's might have little to do with what is going to drive the stock in the next 3-5 years. Whether or not you can take a longer-term view is really going to depend on your fund and investment philosophy, but there can be differentiated narratives for different portions of the timeline. 

The key is to arrive at your own conclusion independently, then assess whether or not that conclusion is differentiated. Like a lot of things, differentiation exists on a spectrum, and not every conclusion will be differentiated from the consensus, especially if your view is that the consensus is more right than it is wrong which seems to be the case based on your 'large caps are well studied' comment. Well-studied does not = efficient. Try to approach every new idea without any pre-conceived notions. Pre-conceived notions are often purely bias and detrimental to the research process. 

Jul 7, 2021 - 2:45pm

Frequently. I primarily cover macro and often express views on SNs in large caps. Models, both mental and formal, are necessary to develop a differentiated view, because they allow you to have a reference point to compare new information against.

  • One of the earlier posters referenced reading news articles of PE acquisitions and tied it into a thesis around a potential target. What underlies this connection is a mental model of a) how sponsors make deals, b) what makes a deal attractive to a sponsor. Just reading the news is not sufficient to gain insight if you do not understand the decision-making process of the buyer. 
Jul 7, 2021 - 11:19pm

shaquille_oatmeal_official

Yep that's exactly what I was trying to get across. Would you mind sharing a differentiated view you've had in the past/if it worked out? Curious

A differentiated view doesn't necessarily mean you are buy and consensus is sell. An example from last June was the marine shipping industry. Consensus was neutral/bearish due to structural issues, which meant that as gdp growth rates were being revised higher for 2021, forecasts of export/import volumes were not increasing fast enough. For us the connection was a combination of inventory levels and where demand (product categories) was coming from. At that point in time, the consensus idea was that a quick surge in consumer goods would fade as eventual reopening would lead to a shift from goods to services. What had some proprietary data that helped us build confidence in an acceleration of goods volume. So in this case, differentiation did not come from basic intuition, but a model to test various scenarios, finding an expectations gap, and (with further due diligence) building confidence in it.

Consensus opinion can be slow to change. For example, earlier this year we saw bond yields peak, and tech start to recover. Yet most firms are still pushing the reflation narrative. In the meanwhile, NDX is now at ATH and DJI is lagging. Now, subsequently this may flip - especially come earnings season - but it was not that hard to see that inflation was not going to get out of control considering what CPI components were telling us (consensus also was net moderate on inflation). The trade here was in selling reflation and buying tech for the rotation out, which was not consensus. 

Jul 8, 2021 - 9:49am

Wise man once taught me not to worry about consensus NOW, but consensus WHEN. 

The battlefield is littered with folks who were too early (Apple in the 90s), too late (pets.com), or just wrong (DC vs AC power, betamax, new Coke, etc?).

The Information age spawned companied like Facebook, Cisco, etc.  What will the next Age be?  Everyone can be John Paulson or Michael Burry once in their life, but can you see the next cycle and profit with ideas that are currently out of favor?

Namaste.

D.O.U.G.

  • 2
Jul 8, 2021 - 10:48am

Investors love to talk about differentiation. The reality is that being different or contrarian implies a lot of career risk. Many LPs don't have the patience to stick with underperformance for more than 2-3 years, so in addition to being contrarian and right, your thesis also needs to be timed properly, especially if you're short. As an LP, I'd argue that the most established hedge fund PMs aren't great stock pickers, they're really great risk managers. LP investors aren't trying to buy lottery tickets, they're trying to back managers than can generate a few hundred bps of alpha over a long term time horizon (generally 3-10+ years). As such, it doesn't pay to be different. One sharp drawdown can result in a run on the fund or a substantial decline in the capital base. When fees are 1-1.5% and the incentive is 15-20%, you're really better off not trying to shoot the lights out and instead focusing on growing your business over a long period of time.

Another point I'd make is that a lot of the so-called "alpha" in the world is really secular growth versus a broad benchmark (i.e. a software/ecomm/payments tilt against the MSCI World or S&P 500). Take any of the top tech LS or LO hedge funds and benchmark them against the Bessemer Emerging Cloud (ticker: EMCLOUD) index... the alpha evaporates quite quickly. 

Jul 12, 2021 - 11:22am

Areas where I still see HFs differentiate are those who can take an intra-capital structure view and not silo'ed off into pods. My experience is that most equity guys don't understand credit at all, while a lot of credit guys can't think outside their credit boxes. Funds that have a flexible mandate L/S credit/equity (i.e. Mudrick, Elliott, etc.), aren't afraid to take concentrated plays in a cap structure, and aren't silo'ing off like a MM can still capture consistent alpha. 

Jul 15, 2021 - 12:51am

Differentiated view is the end but not the means. Building a thesis for the sake of being differentiated is a quick way to lose money.

From my experience, doing the research faster, more thoroughly and accurately will lead a high probability of being early and right, which is the same as differentiated.

Also, have to be mindful of anchoring valuations to preconceived views of a stock based on feelings.

Other HF posters have mentioned and I'd reiterate: grind out the work and be more accurate and quicker than others.

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