Stock pitches have been a part of finance interviews since the dawn of man. People typically underestimate the importance of pitches in an interview, but think about it this way: if you're interviewing for a position at any sort of financial institution - hedge fund, private equity firm, investment bank, etc. - how can you be expected to perform your job competently if you lack a solid pitch? Even for investment banking analysts, whose job consists less of investment research and more of Excel work, it's integral to be ready to pitch a stock.
The Stock Pitch in an Interview
These positions rely on preparation and due diligence to mind-numbing degrees, so it's critical that you demonstrate both of these characteristics with a well-researched pitch. Here's @WhiteHat, a hedge fund analyst, on its importance.
For many positions, the pitch is the biggest part of the interview. It gives the interviewee the opportunity to explain his or her thought process and the way they evaluate an investment opportunity. It can separate the fakers from the legitimate candidates. In many cases, it can be the difference between being asked back and being sent home. But there's no class you can take that teaches you to properly pitch a stock.
There is no class on how to pitch a stock, so let this be your learning center. Included, in addition to our own guide, is a video detailing the pitch and what goes into it courtesy of the WallStreetOasis Video Library and a PDF (attached at the bottom) that includes a visual summary as well as an example.
Stock Pitch Example
Ann is an industry veteran with plenty of tips for your hedge fund interview. At 06:59, she discusses generating stock ideas. At 10:30, she goes over what makes a good pitch. And at 15:55, she gives an example of a pitch.
This video is courtesy of the WallStreetOasis Video Library, which contains 100+ exclusive videos curated by industry professionals to help guide you through the world of finance.
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Investment Idea Generation
Put yourself in the shoes of a hedge fund: you've narrowed an open position down to two candidates. Both check all of the boxes. Excellent qualifications, fit with the firm, the works. One comes from a top university with a perfect GPA; the other from a top 25 university with a 3.65. When you have two candidates like this, do you separate them by academics, or do you look at their investment evaluations?
Let's assume the second candidate nails the pitch with an excellent idea backed up by thorough research, while the first candidate pitches a run-of-the-mill stock with the requisite research but nothing beyond the surface level. We take the candidate who nailed the pitch.
Generating ideas for investments isn't easy. Otherwise passive funds wouldn't occupy a third of the market. Here's @BlackHat, a hedge fund partner on why you need to be able to generate your own original ideas.
Believe it or not, an alarming number of managers (with similar strategies, of course) are looking at the same set of companies at a given time. Put simply, most analysts are incapable of consistently sourcing new ideas on their own.
While no idea can be truly original, being one of the first and/or one of the few to discover a drastically mispriced security, impending catalyst, etc., is how an analyst or firm can make a killing in a hurry. By the time your indexers (think asset managers, overly-diversified hedge funds, etc.) and dumb money (momentum, retail investors) are in, the return potential is mostly behind them. What's left is often little more than just a market return.
So how do you go about generating ideas? First, according to @BlackHat, a hedge fund partner, there are two classes of ideas: abstract methods and common methods. First are the three abstract methods. These are the methods you should use to find a good stock to pitch.
- Management or industry referrals: Obtaining information from an executive beyond the surface level. Effective without a doubt, but far more circumstantial, which is why we will only cover it briefly.
- Thematic investing: Identifying themes that indicate sectors ripe for the investing.
- Industry vertical stripping: Finding where the margin is going in a value chain from the basic supplier(s), to the supplier(s), to the end user(s)
Onto the first abstract method of idea generation for pitches, management or industry referrals. This goes beyond asking an executive what they think of competitors in the industry and the like. If you simply ask an exec what they think of a competitor, you'll get a prim and proper answer. You have to mine for the information. Diamonds don't come easy. There's an art to it explained by @BlackHat, a hedge fund partner.
If you ask them who scares them the most in the enterprise business and they say it's Microsoft, now you have a free avenue to start talking specifically about what MSFT does well and what advantages they have over everyone else. (At the end of the day, most of this is common sense in social interaction...)
Other questions I like to ask: is the industry entirely rational, or is there anyone you think is throwing the industry out of whack? Is there anyone you would consider a good fit for your business, either to acquire or as a strategic partner? Is there a certain manager in the industry you respect (or dislike) most? Who else is taking share and why?
The next method of idea generation is far less circumstantial: thematic investing. Think about the high-level themes that point to a certain sector with optimistic projections. From there, your due diligence finds the few companies to focus on.
Here's @BlackHat, a hedge fund partner, on thematic investing with an example and how you go about it.
The most current example I can think of to describe this is the insanity surrounding firearms and ammunition since the beginning of the Obama administration, and accelerated by Sandy Hook and other mass-shootings.
The theme in this case was obvious: certain types of ammunition and "assault rifles" were going to be under heavy scrutiny and began flying off the shelves at any dealer you could think of. The tough part isn't identifying the validity of the theme - this one was actually very easy to validate - but picking apart the sector to find the best way to invest in it.
The last means you should use to find stocks to pitch is industry vertical stripping. This is an awesome, readily available, yet rarely used technique for idea generation. Why is that the case? Because it's easier to start swinging your ax at the tree right away than it is to first sharpen your ax.
Vertical stripping is the process of mapping out, in clear detail, "the value chain of an industry from the most basic supplier to the end user, in order to identify all the companies along the way, with the objective of finding where all the margin is going" (@BlackHat - Hedge Fund Partner).
Here's @BlackHat, a hedge fund partner, with his favorite example of vertical stripping.
Our favorite example is the airline industry: it's been around forever yet is known as being a terribly competitive and unreliable business... despite the fact that we continue to pay higher and higher airfare for basically the exact same service! So where's all the margin going? Well, at the top, there's the aircraft OEMs (BA, EADSY) operating a duopoly, and even above them, the engine manufacturers who are highly consolidated with only three major players (GE, UTX, RR) and a duopoly above that in investment castings (AA, PCP).
Most of these businesses earn solid returns on capital, and through industry vertical stripping, we've already discovered some businesses worth researching. Now you have to look below the plane makers and start thinking about how aircraft are distributed among airlines. Once airlines have planes, there are other supportive businesses that come into play. Upon researching, we find a couple of businesses with absurd returns on capital. Now you see how industry vertical stripping works and the enchanting results it can produce.
These are the three techniques of abstract idea generation. These techniques go beyond what the majority is doing, therefore increasing your likelihood of finding golden geese. We prefer thematic investing and industry vertical stripping to industry management referrals because of availability.
@Simple As..., a hedge fund vice president, gave insight on how his idea generation methodology is a combination of two of the above.
I often find myself combining thematic investing and "industry vertical stripping", too. Say I find a product/trend that I think can be huge. I will usually break down the value chain to determine the best way to monetize this trend. I think you kind of implied this in the write-up, but maybe it wasn't as obvious to some others. Or maybe I'm just way off base and have been doing it wrong, ha ha.
Things to Not Do in The Stock Pitch
These are the most common methods of finding investment ideas. While you may find it acceptable to utilize these techniques to find stocks, we recommend avoiding them since common methods lead to common investment ideas, and the pitch is something that can make or break you - especially if you're interviewing for a private equity firm or hedge fund. The three methods to avoid are as follows.
Quantitative screening: Screening based on quantitative characteristics. There are three disadvantages to this approach.
- They're easy to run. (Everyone is already using them. They don't add much value.)
- Trailing/forward numbers may be based off something cyclical or one-time, making the valuation less meaningful.
- Ignores catalysts.
Quantitative Screening for Stocks
As the name suggests, this is simply the construction of a list of securities that fit your specified quantitative characteristics. These are used most often to filter for statistical cheapness on a P/E, EV/EBITDA, FCF Yield, or other valuation metric, but can also be used to screen for companies of a certain quality based on margins, ROIC, ROE, etc. An efficient way to build a watch list of companies that appear very cheap while still having financial results within your specified parameters.
Sell-side/word of mouth: Pitches from sell-side fellows or anyone else for that matter. Once the pitch is made, the cat is likely out of the bag, and the current price won't be nearly as good, which is a key disadvantage of word-of-mouth ideas.
Warnings About Ideas from the Sell-Side or from Word of Mouth
Most monkeys on WSO have probably heard enough pitches to know how common idea generation by word of mouth / idea sharing is in the industry. But here's the thing about other people's ideas: most analysts share ideas with more conviction than they'd have with their own money.
The sell-side is another source of ideas, albeit a non-BlackHat approved one, since a buy rating isn't exactly worth the same amount coming from the brokers.
Sifting through holdings from public equity firms:
Getting Investment Ideas from Hedge Fund Public Disclosures: 13-Fs
These are as much a goldmine of good ideas as they are of misinformation. Something to keep in mind when combing through 13-Fs is that plenty of funds like to "window dress" their portfolios at the end of the quarter to mask certain investments or appear to be holding names through the quarter that they really didn't have.
Also, since short positions and international equities are not reported, you never quite know what's going on under the hood, even with the longs. To state the obvious, 13-Fs aren't going to give you any indication of what the actual reason for holding a security is.
Again, common techniques generate common pitches. Considering the gravity of the pitch, we can't recommend using the common methods detailed above to find investment ideas.
Research for Stock Pitch
While we advocate using the abstract methods to generate atypical investment ideas regardless of whether you're applying to an investment bank, hedge fund, or private equity firm, the research process varies depending on the type of firm. The buy-side is all about investment evaluation, so the research process for a stock pick for a buy-side firm will have to be far more thorough and long-winded than for an investment bank.
For investment banking pitches, a couple days of research starting out with a good set of investment ideas will suffice. But for the buy-side, candidates often spend weeks or months finding and researching stocks for pitches. The reason is often the same reason they want to work for buy-side firms to begin with; some people enjoy immersing themselves in the markets and identifying exceptional investment opportunities.
We recommend reading all of what @Simple As..., a hedge fund vice president, has to say as its value is incredible. Most of you will ignore the piece, but the ones who don't are the ones who go the distance, the ones who have the edge come interview. For those of you who don't want to go the distance, here's an incredibly unjust summary of what @Simple As... had to say.
What to Research for Your Interview?
- What drives revenue? How does a business make money?
- Competitive Positioning: Select a universe of competitors with an understanding of what drives the business. Then ask these three questions:
- How does the market see my target?
- How do competitors see my target?
- How do customers see my target?
- Management: Analyze management's (Board of Directors) compensation and incentives to see if they align with what you want as a shareholder. In addition, judge the merit of their decisions (capital allocations based on realized returns and future positioning).
- Financials: Tear the company to pieces line-item by line-item as deep as you can, going back usually five to seven years.
- Speak with management (inapplicable to you)
- Model and valuation: Create a model from scratch over a long period of time as questions will come up throughout the process. The valuation method in skeletal form:
- Derive projections from thesis.
- Stress-test projections.
- Derive range of values for the business.
Value defined as a product of growth, returns, and cost of capital (also called the discount rate or required return). @Simple As..., a hedge fund vice president: "What's more important - in my opinion - than a scientific and precise valuation is that you understand what is going to cause the market to realize the intrinsic value of the asset and that you get the timing of the catalyst correct.
- The pitch: An aspect which we cover extensively below.
What to Include in the Investment Pitch
You've generated some exceptional investment ideas. Now what? Pitching a stock is a process. Once you've found the ideas, it's time to research to find the winner. Your research forms the greatest part of your pitch, it's the spine of the entire thing. You just have to organize it in a clear manner that effectively depicts the appeal in your idea.
There are four facets of your investment that must be included: industry overview, company-specific overview, where the market is wrong, and valuation.
Here's what you need to know from @WhiteHat, a hedge fund analyst.
- Industry Overview: Outline the industry and make the case for why it's an attractive industry for investment.
Consider the following questions:
- What makes this industry economically viable?
- What makes the barriers to entry high enough to keep competition from destroying these economics?
- What is pricing power like, and why do consumers accept it?
- Company-Specific Overview: Where the company you're pitching fits into the market.
- Where the market is wrong: Point out why the security might be underpriced, what the catalyst(s) will be that changes this, and why you think that catalyst will happen.
- Valuation: What's important to know is the multiples for your company, the industry, and why there is a difference or should be a difference. This will usually relate to whatever it is the street is missing. Be sure to know the basics of your company's capital structure and what valuation metrics are important. This is a good opportunity to demonstrate that you're not stupid and know when to use EV/EBITDA over P/E or something else. Also important is some notion of a price target post-catalyst, and some estimation of what you think would happen to the stock price if the catalyst worked against you. This gives the interviewer a chance to see that you understand what risk/reward is.
Understanding these four things, you should be able to keep them in mind while researching the ideas you already generated. At that point, you decide which stock you want to pitch and include these four things in your pitch.
Here are four more things to include, from @derivstrading, a retired S&T analyst:
- What is the catalyst for the stock? Why hasn't the catalyst been priced in yet?
- The trade details (timeframe, stop loss, profit target, any strategies, i.e., tiered buying/selling)
- What has the stock has done over the past three months/years? What have the key drivers been?
- What has the stock has done relative to the index (drag historical prices and calculate a correlation/beta factor)?
Now you know what to cover in your pitch. Typical length ranges from five to ten minutes. You don't want to go over that as you want to keep the interviewer's attention. In addition, you want to keep around at least five minutes, so you cover all your bases.
Written Stock Pitch
Many hedge fund analyst job postings ask for a written pitch. The general length of these written pitches is one to two pages, although you can certainly go over that if you want. The point is they don't want an opus explaining every thought you've had; save it for the job. Hedge funds simply want to see how you evaluate an investment opportunity.
This layout provided by @WhiteHat, a hedge fund analyst, covers all of your bases and is an effective way to organize your letter.
- Introduction: Briefly explain the business, competitors, major industry metrics, etc.
- General Recommendation: Are we looking at this as a short or a long? What's our time frame?
- Why Now: What makes it attractive now? Why does the market love/hate the stock all the sudden?
- Commentary/Catalysts: Is the market justified in its love/hate? What could happen to make stock rise/fall? What would the metrics look like if each catalyst happened?
- Explanation: Why is the catalyst most likely in favor of your recommendation? Why is the other unlikely? What research brought you to this conclusion?
- Valuation: Briefly explain historic valuation, industry multiple, earnings growth potential, and what kind of return you think we can get (and over what time horizon), and the same for if downside catalyst happens.
Stock Pitch Letter Examples
Even with the layout above, starting out might seem overwhelming. It's not an easy thing to do, formulating a letter clearly illustrating your beliefs with the understanding that you will get critiqued by industry professionals on both your opinion and your writing. Luckily, we have you covered in terms of identifying good investment ideas and knowing what to research. In addition to the above layout, which will help immensely in preparing your pitch, here are some real-world examples:
There are two overarching factors of your letter you should keep in mind, according to @Gray Fox, a hedge fund analyst.
- Why your view is differentiated from the consensus
- Why your view is correct.
Original Thread - How to Pitch a Stock
So, yesterday I was selected to participate in the Wharton Stock Pitch Competition. However, I have to submit a PowerPoint TODAY about the stock along with all of the information I plan on presenting. Also, I am presenting to two executives: one from Barclays and the other is from RBC.
Now, I have no experience with this sort of thing and can use any advice/info that you guys can provide me.
What do executives look for when someone is presenting a stock?
What types of statistics or info should I use to back up my claim?
How should I present it?
Are there any techniques that people use to present/convince others that their idea is legit?
Please. Anything helps.
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