Here at StockViews we’ve reviewed thousands of articles over the course of 2015. We’ve also accumulated a ton of valuable feedback from our clients. As a result we’ve been asking ourselves this question: Why is it that certain analyst reports get such positive feedback from the client? And why do some analysts fall short, despite having strong sector knowledge and doing thorough analysis? Given that we deal with such a diversity of investment styles and stocks, I’ve been surprised at how much of the feedback is common to every article. It’s become clear to me that many analysts are making the same mistakes over and over – this is frustrating (for us and for them) when they’re clearly putting so much work into the process. This experience has inspired me to put together “12 Laws of Equity Research”. In compiling this I’ve also drawn strongly from previous (very thorough) work by James Valentine in his excellent book “Best Practices for Equity Research”.
- Start with your Investment Thesis
Always start with a concise investment thesis (I’m rating this stock buy/ sell because…). The most common error made by analysts is that they are not conclusion-oriented. Express your thesis in the form of 2-5 short bullet points. The remainder of the note should be structured to justify that conclusion.
- Structure your Note
Spend time in advance thinking about the structure. Ideally you should then use your bullet points from (1) above as headings for the body of the note. A well-structured note with sub-headings makes it so much easier for a fund manager to navigate versus a long string of text.
- Be Stock-Oriented
Your client ultimately deals in individual equities, so focus on the relevant stock(s). If you find yourself writing about something that has no relevance at the stock level, delete it.
- Focus on the 2-3 things that matter
Inexperienced analysts often get carried away by trying to cover everything in detail. The best analysts recognize that there are usually just a few key drivers that really impact on the value of a stock. They spend the vast majority of their time working out what those drivers are and then seeking to understand those drivers as completely as possible. Going beyond these key drivers will often make the article feel far too “noisy” and has limited analytical value.
- Be Concise
Connected to point (4) above. You should provide the minimum amount of information that allows you to validate your investment thesis. Any more than that and you will loose the focus of the investor. Remember Einstein’s words: “Any intelligent fool can make things bigger and more complex…It takes a touch of genius – and a lot of courage to move in the opposite direction”
Avoid making vague statements, particularly when it comes to forward-looking data. For example, don’t make statements like “revenues are likely to increase after 2016” or “margins are likely to be squeezed”. Quantify it. So, for example : “In my base case I expect revenues to rise by 2% p.a. after 2016”. Or you can avoid being too precise by giving a range: “I expect revenues to rise at a moderate 2-4% p.a. post 2016”.
- Support with Data
Avoid making assertions that are not backed by evidence or data. For example don’t write: “I believe cement prices will rise over the next five years” without explaining why you believe that to be the case. If this assertion is based on the work of a credible third party, then you should clearly reference that third party.
- Use Charts and Illustrations
In many situations the use of a chart or illustration can convey your point much more powerfully than the use of a block of text. Mixing text with charts is also a good way to keep the attention of the fund manager. When you stand back from the note, ideally it should contain a good mix of text, charts and numbers.
- Be Balanced
Nobody is interested in reading a sales pitch. A good analyst will have considered carefully both the bull and bear case before coming to a conclusion. A balanced report also sends a strong signal to the manager that the analyst has been extremely thorough in reaching their view.
- Make Use of Historical Data
It is futile to study a company in isolation. To make sense of it you will need to compare the company to its peers and to its own history. A strong analyst will have gone back at least 10 years to study the historical cycle – and they will know exactly how the company’s sales and margins have reacted under a number of different scenarios.
- Use Examples
Bring in real-world examples to illustrate the points you make. I’ve found the use of two particular techniques to be very powerful:
- Recent anecdotes about the product from customers/ suppliers/ competitors.
- Recent photos of the product in situ, or photos of the company’s assets in use from a site visit
- Utilise your Contacts
We live in a world where the vast majority of information is easily accessible. Therefore fund managers tend to place a lot of value on information that is not easily accessible. This is information that you might only be able to pick up by speaking to people who are close to the industry/ the company – so make sure to utilize any contacts you have. The advantage of a diverse network of analysts is the localized knowledge that comes with analysts spread all over the world (contrary to the sell side banks where analysts experience only a very narrow environment of similar financial professionals).
If you’re an independent analyst, or represent an independent firm then we’d love to hear from you. We’re currently interviewing for new analysts on the platform and we’re looking for those who don’t just know their stocks and sectors, but can convey that knowledge with a well-constructed report. You can apply for the analyst position here. I will leave you with the words of James Valentine who sums up much of his work as follows:
“The most distinguishing element of great analysts is that they put a disproportionate amount of time into forecasting only a few of the factors likely to move their stocks” James Valentine, Best Practices for Equity Research Analysts