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But in all likelihood, even if were wrong, the company is simply valued appropriately at 130. And then we explain how to hedge against these risks with put options. The same differences apply to the Shawbrook research report. The stock pitch, but the stock pitch there is a short recommendation where we claim that the company is overvalued by 30-50. And that sums up the differences perfectly: a short recommendation with 30-50 downside in a stock pitch turns into a hold recommendation with roughly equal upside and downside in a sell-side research report. Whats in an Equity research Report? Ive been harsh on equity research here, but I dont want to disparage it too much.
Equity, research, analyst, resume, sample: Market Research, analyst, resume
In both fields, you explain how you arrived at the companys implied value, which usually involves pasting in a dcf or ddm analysis and comparable companies and transactions. The methodologies are the same, but the assumptions might differ substantially. In research, youre also more likely to point to specific multiples, such as the 75th percentile ev/ebitda multiple, and explain why they are the most meaningful ones. For example, you might argue that since the companys growth rates and margins exceed the medians of the set, it deserves to be valued at the 75th percentile multiples rather than the median multiples: Investment Thesis, catalysts, and Risks This section is short, and. We do give reasons for why these companies might be mis-priced, but the reasoning isnt that detailed.
For example, in the Shawbrook report we state that the. Mortgage market might slow down and that regulatory changes might reduce the market size and the companys market share: Those are legitimate catalysts, but the report doesnt explain their share-price impact in the same way that a stock pitch would. Finally, banks present Investment Risks mostly so water they can say, well, we warned you there were risks and that our recommendation might be wrong. By contrast, buy-side analysts present Investment Risks so they can say, there is a legitimate chance we could lose 50 lets hedge against that risk with options or other investments so that our fund does not collapse. How These reports Both Differ from the corresponding Stock pitches The jazz equity research report corresponds to a long pitch thats much stronger: we estimate its intrinsic value as / share, up from 170 in the report. We estimate the per-share impact of each catalyst: price increases add 15 to the share price, more patients from marketing efforts add 10, and later-than-expected generics competition adds. We also estimate the per-share impact from the risk factors and conclude that in the worst case, the companys share price might decline from 130 to 75-80.
Similarly, the report might mention catalysts and investment risks, but there wont be a link to a specific valuation impact from each factor. So the typical stock pitch logic (We think theres a 50 chance of gaining 80 and a 50 chance of losing 20) wont be spelled out explicitly: your Sample Equity research Reports to illustrate these concepts, Im sharing two equity research reports from our financial. We started by creating traditional HF/AM stock pitches and valuations and then made our views weaker in the research reports. The typical Sections so lets briefly go through the main sections of these reports, using the two examples above: Page 1: Update, rating, Price target, and Recent Results The first page of an Update report states the banks recommendation (buy, hold, or Sell, sometimes with. For example, in both these reports we reference recent earnings results from the companies and expectations for the next fiscal year: we also give a target price, explain where it comes from, and give our estimates for the companys key financial metrics.
We mention catalysts in both reports, but we dont link anything to a specific valuation impact. One problem with providing a specific target price is that it must be based on specific multiples and specific assumptions in a dcf or ddm. So with jazz, we explain that the 170.00 target is based.7x and.3x EV/ebitda multiples for the comps, and a discount rate.07 and Terminal fcf growth rate.3 in the dcf. Next: Operations and Financial Summary next, youll see a section with lots of graphs and charts detailing the companys financial performance, market share, and important metrics and ratios. For a pharmaceutical company like jazz, you might see revenue by product, pricing and # of patients per product per year, and ebitda margins. For a commercial bank like shawbrook, you might see loan growth, interest rates, interest income and net income, and regulatory capital figures such as the common Equity tier 1 (cet 1) and Tangible common Equity (TCE) ratios: This section of the report explains how the. Valuation The valuation section is the one thats most similar in a research report and a stock pitch.
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Youll almost always see recent news and updates on the first page of a research report: These factors may play a role in hedge fund stock pitches as well, but more so in short recommendations since timing is more important there. 2) Far-Outside-the-mainstream views Are less Common One comical example of this trend is how all 15 equity research analysts covering Enron rated it a buy right before it collapsed : Sell-side analysts are far less likely to point out that the emperor has no clothes. 3) Research business Reports give target Prices Rather Than Target Price ranges For example, the company is trading.00 right now, but we expect its always price to increase to exactly.00 in the next twelve months. This idea is completely ridiculous because valuation is always about the range of possible outcomes, not a specific outcome. Despite horrendously low accuracy, this practice continues. To be fair, many analysts do give target prices in different cases, which is an improvement: 4) The Investment Thesis, catalysts, and Risk factors Are looser These sections tend to be afterthoughts in most reports. For example, the bank might give a few reasons why it expects the companys share price to rise: the company will capture more market share than expected, it will be able to increase its product prices more rapidly than expected, and a competitor is about. However, the sell-side analyst will not tie these factors to specific share-price impacts as a buy-side analyst would.
For example, the companys stock price is 100, but you believe its worth only 50 because its about to report earnings 80 lower than expectations. Therefore, you recommend shorting the stock. You also recommend purchasing call options at an exercise price of 125 to limit your losses to 25 if paper the stock moves in the opposite direction. In an equity research report, youll still express a view of the company thats different from the consensus, but your view wont be dramatically different. Youll spend more time on the company background and Valuation sections, and far less time and space on the catalysts and Risk factors. And you wont even write a worst-Case Scenario section. If a company seems overvalued by 50, a research analyst would probably write a hold recommendation, say that theres uncertainty around several customers, and claim that the companys current market value is appropriate. Oh, and by the way, one risk factor is that the company might report lower-than-expected earnings. The four main Differences in Equity research The main differences are as follows: 1) Theres More Emphasis on Recent Results and Announcements For example, how does a recent product announcement, clinical trial result, or earnings report impact the company?
Reports on entire industries are also very long. And there are other types, which you can read about here. In this tutorial, were focusing on the company Update or Company note-type reports, which are the most common ones. The full Tutorial, video, and Sample reports. For our full walk-through of equity research reports, please see the video below: Table of Contents: 1:43: Part 1: Stock pitches. Equity research Reports 6:00: Part 2: The 4 main Differences in Research Reports 12:46: Part 3: Sample reports and the typical Sections 20:53: Recap and Summary, you can get the reports and documents referenced in the video here: If you want the text version instead. If youve forgotten, a hedge fund or asset management stock pitch ( see a sample healthcare/pharmaceutical pitch here ) has the following components: Part 1: Recommendation Part 2: Company background Part 3: Investment Thesis Part 4: Catalysts Part 5: Valuation Part 6: Investment Risks and.
You might have to write a research report as part of the interview process. For example, if you apply to an equity research role, especially in an off-cycle process, you might be asked to draft a short report on a company. And then in roles outside of er, you need to know how to interpret reports quickly and extract the key information. Equity research Reports: Myth. If you want to understand equity research reports, you have to understand first why banks publish them: to earn higher commissions from trading activity. A bank wants to encourage institutional investors to buy more shares of the companies it covers. Doing so generates more trading volume and higher commissions for the bank. This is why you rarely, if ever, see sell ratings, and why hold ratings are far less common than buy ratings.
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Even though you can easily find real equity research reports via the magical tool known as google, weve continued to get questions on this topic. Whenever I see the same question over and over again, you know what I do: I bash my head in repeatedly and contemplate jumping off a building and then I write an article to answer the question. To understand an equity research report, you must understand what goes into a stock pitch first. The idea is similar, but an er report is a watered-down version of a stock pitch. But banks have some very solid reasons for publishing equity research reports: wait, Why does This Topic Matter? You might remember from previous articles that equity research teams do not spend that much time writing these reports. Most of their time is spent speaking with management teams and institutional investors and sharing their views on sectors and companies. However, equity research reports are still important because: you do still spend some time doing the required modeling work (15) and writing the reports (20).