Request: Tips/Guide on Top-Down analysis for stock-picking
I come from a L/S Bottoms-Up background, and while I know the Top-Down theoretically, in practice I am unsure as how it is done. Bottoms-Up has, for instance, multiple ways to be conducted, and every business is (to an extent) different. I do not know the multiple ways a Top-Down has.
I am starting a new job at a top sell-side in a top strategist team. While confident that I can perform, given that I got hired, I know I have to learn this new form of analysis. I would like to learn it as quickly and efficiently as possible in order to contribute.
Thus, does anyone have any tips or a guide on Top-Down analysis for stock picking? Any literature of any kind would be greatly appreciated!
Absolutely, I can provide some guidance on top-down analysis for stock picking. Here's a quick rundown:
Start with the big picture: Look at the overall economic environment. This includes factors like GDP growth, inflation, interest rates, and other macroeconomic indicators.
Next, narrow down to specific sectors: Based on your macroeconomic analysis, identify which sectors are likely to perform well. For instance, in a growing economy, sectors with higher sensitivity to GDP growth might underperform, while those with low sensitivity might outperform.
Within sectors, pick industries: Look for industries within those sectors that have low betas and are tilted towards growth.
Finally, pick specific companies: Find companies within those industries that are best aligned to your prediction.
Remember, when picking stocks, prioritize growth at value, growth at fair, and value at value. Use multiple metrics for growth, do your due diligence, and generate a price target. Set a required rate of return and then solve to see if the current price is a value, fair, or rich. Make your trades if a trend has settled (3 months excluding most recent month at minimum).
Also, don't use generic asset allocation. Instead, use a risk parity approach. Develop multiple themes with low correlation and invest in them.
I hope this helps! Remember, practice makes perfect. The more you apply these principles, the more comfortable you'll become with top-down analysis. Good luck in your new role!
Sources: A Contrarian View - Raging Bull, Long term, concentrated, deep fundamental investing, How long does it take to formulate a investment idea / stock pitch, Stock Pitch Sample Template - Proven Examples to Help Ace Your Interview
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