Introduction Paragraph- Investing in a public company’s stock can be argued for or against by a short piece of writing or presentation backed by strong data, valuation metric information, catalysts, and an assessment of the risks, which is called Stock Pitch. Here is the topic- Stock Pitch How To Do In Interview?
During an interview, there are some vital elements that should be highlighted about the company. A stock pitch can be compared to a sell-side pitch if that helps. Your industry knowledge can be displayed during the pitch. Adapting your answers quickly to each interview is another benefit. You could conclude by illustrating your business knowledge.
Answer Paragraph- Interviews for sales and trading positions usually include this question. You are the only exception to this rule if your resume discloses anything about market transactions. The preparation time for this question should be about half an hour. In contrast, you should focus on gaining an understanding of DCF, comparisons, comparative transactions, the CAPM, and WACC. Your investment banking interview depends more on these concepts than on any other. Nevertheless, you’ll need to prepare a stock pitch just to be prepared.
An Ideal Stock Pitch Structure
- The recommendation: You should be able to let people know if it is Long or Short term and how much the company is worth. Neutral recommendations are inappropriate unless the company is assigned to you.
- Background of the company: In what areas does the company deal with products/services? What are its revenues and EBITDA? What is its market capitalization, and what is its current valuation multiple? Price/volume graphs earn bonus points.
- Investing Thesis: Three key factors lead to an imperfectly priced stock. They have not factored in due to reasons X and Y. It’s a good time to long/short this stock because the market is incorrect.
- Observations: This pricing imperfection will be realized by the market in six to twelve months, leading to a price correction and the opportunity to profit. An event may be a new product launch, acquisition, earnings announcement, divestiture, clinical trial, or financing activity.
- Market Value: The Long recommendation would require you to show the stock is undervalued (for example, the stock is currently trading at $25, but it is probably worth $35-40); the Short recommendation would require you to demonstrate why the stock is overvalued.
- Factors at Risk and How to Minimize Them: Your investment thesis could be wrong for one or two reasons both market- and company-specific, and then you can explain what you can do to manage these risks. Is there any way to limit your losses if you are wrong?
Keep this pitch brief. If this is to introduce yourself or to be considered for a job interview, it should be between 2 and 3 pages at most. If you plan to present for more than 10 minutes, create a slide presentation, or provide a certain number of pages, the length of the presentation should be less than 10 pages.
Stock Pitch Idea Generation: Building an Investment Thesis
Having an industry or company that you’ve already followed is critical to completing a stock pitch within a few days, even if it’s a 2-3-page pitch. A career in hedge funds or investment would be a better fit for you if you don’t want to do such a thing. The best investors pitch stocks because it is their hobby. They are passionate about the way they do it. In lieu of identifying companies whose stock prices are likely to change significantly over the next six to twelve months, it is best to identify companies that are under or overvalued.
Pitch length of the stock
Stock pitches are generally four to twenty-page word papers. A pitch’s objective determines how long the paper should be.
Whenever possible, keep your pitches short and sweet. Shortening your stock pitch encourages you to focus on the most important aspects of your investment proposal. Be succinct. Your pitches should be two to three pages long.
However, if you’re using this pitch to demonstrate your investment skills, you’d be better off with a long-form pitch. Investment presentations, interviews, and stock pitch competitions all fall under this category.
Prepare all of your analyses and exhibits as a PowerPoint presentation for the long-form. You should demonstrate a thorough understanding of current industry trends, analysis of competitors, the economics of the unit, capital expenditures, estimation, evaluation, and risks.
Investment analysts pitch at varying lengths on the job. Each portfolio manager has a different style. A few people prefer lengthy, detailed case studies similar to those in private equity. There are some users who prefer only bullet-pointed emails. Don’t forget to cater to your portfolio manager.
Process Of Researching And Valuing A Stock Pitch
Conduct Market And Company Research: See the latest financial reports and investor presentations for the company. Furthermore, press releases list products and services offered by the company.
- Using DCFs To Value a Business: There is no need to create a 5,000-row spreadsheet for revenue and expenses, but you should go beyond percentage growth assumptions. You should try to align key expenses to the number of units sold or the number of employees in the main segments to project revenue. DCF models with 100-300 rows are not necessary; it would be too large a model to use a 3-statement model. The data of companies must also be familiarized in addition to the Public Comps. Alternatively, you can use Finviz or Google Finance if you do not have Capital IQ or FactSet. For an example of comparable company analysis, see our tutorial.
- Research Real-World Scenarios if You Have The Time: It is helpful to speak with people in person for a few hours to get a better idea of the company and industry’s overall prospects. If you are looking for suppliers, you can use LinkedIn, for example. For partners and employees, you can use LinkedIn, too. Get in touch via email and ask if they can spend a few minutes talking with you. You can also describe how investors see your industry in exchange for this.
Making a small effort to “channel check” can result in huge improvements.” There is no substitute for a direct quote from a supplier at a company’s core.
An Illustrated Guide on how to Start Pitching Companies
First step: Analyze the Fund’s strategy: Ensure the company you are researching is a relative match for the strategy of the fund before opening Excel or Word. As an example:
Investing strategy: Investing long/short in growth and tech/biotech companies.
- An idea for a company that went public recently.
- A better idea: Invest in an undervalued, mature technology company. Adding a life insurance company spin-off to a merger arbitrage pitch is a bad idea.
The Strategy of The Hedge Fund: Long-term industrial/manufacturing fund with a value-oriented investment approach.
- Consider working with a company that produces industrial tools that are undervalued.
- Good but not great: A turnaround effort at a consumer/retail company that has been misunderstood.
- An overpriced biotech startup is a bad idea.
The Second Step: You may want to consider a sector you understand or a sector that fits with the fund’s strategy. As an engineer, for example, consider the tech industry, telecom industry, or media industry. For example-
- When you have experience working for retail companies, you are likely to want to choose consumer/retail.
- Those who appreciate whiskey should consider food and beverage companies.
- Avoid investing in very technical or extremely specialized industries unless a fund is specifically focused on them. Certain industries will also benefit more from the strategy of the fund.
Several tech companies are overvalued and overhyped, making them ideal “Short” candidates, but chemical or industrial sectors usually have undervalued mature businesses that long-term investors can buy.
The Third Step: Screening for midsized companies in the industry. In the absence of Capital IQ access, Finviz is the best tool for screening investments.
- Whenever possible, screen for companies with revenue in the millions to billions of dollars.
The Fourth Step: Identify companies that are driven by three or four core drivers and quite pure-play. Choosing a company with 20 different product lines based on different assumptions is not a good idea.
- Store numbers and average sales per store are important for retail and consumer companies, and projections are straightforward.
- Because different types of vessels in the fleet require different types of assumptions, the maritime and shipping industry is not ideal.
The Fifth Step: A company’s financial statements must be simple. We recommend that companies drop their Cash Flow Statements, Income Statements, and Balance Sheets with more than 30 items on each side.
- The statements can be simplified and consolidated, but you don’t have the time to do that.
The Sixth step: Look for clear catalysts in companies. Pick the company with the most concrete and impactful catalysts if you cannot decide between 2-3 companies.
- Investments in companies that have just announced an acquisition or divestiture, a significant product announcement, or a pivot are good ideas.
- The future growth of a company can exceed or fall short of expectations based on new products and expansions.
- You can still choose a company at random if you are unable to decide after doing everything above.
Last but not least, don’t base your investment decisions on equity research reports. When building your investment thesis, equity research should be used for gathering background knowledge and market data, not for finding investment opportunities.
A Presentation of The Stock Pitch
Several questions and answers will follow your presentation in a “healthy debate”. You will be questioned about your assumptions, your numbers, your primary research, and the level of conviction you have. We would not recommend taking public speaking classes or joining Toastmasters if you’re going to do your pitch more like a conversation than a speech. However, you should make notes in regards to key numbers, sources, and industry statistics. It is important to admit your ignorance upfront. Ensure that you have reviewed it and follow up with the interviewer. It’s unlikely you will be able to remember the source of one specific number since appraisals are filled with numbers even when they’re simple estimates.
Here are the Top Stock Pitch Mistakes to Avoid
Following is a list of major blunders:
- A Model That is too Detailed: It appears that many candidates are more concerned about minutiae in the financial statements than the key drivers. Create a moderately detailed DCF model (100-300 rows), talk to real people about the company, and develop your investment thesis.
- Irrefutable Assumptions: How is a certain year’s revenue growth or margin predicted to be higher than usual? Do you have any historical data, research, or channel checks to support this assumption?
- Catalysts That are Weak or Nonexistent: You should aim for short-term (6-12 months) catalysts that have specific per-share impacts, and you should aim for at least one hard catalyst over a soft catalyst. If you make clear the impact of macro catalysts on your company, they can work.
- Poor or Nonexistent Risk Factors or Those That are too Vague: Risk factors are either left out altogether or are given vaguely. Additionally, many candidates fail to explain how they will mitigate the risks.
- Vacancy: Stock pitches are very different from SATs or GMATs, so many candidates expect to breeze through the process. It will be clear to everyone that you don’t believe in your idea, and you will not be offered the job.
Be Aware of Your Audience
When you are interviewing with a fund, make sure your pitch fits with their investment philosophy. These tips will help you pitch correctly:
- Funds that do only fundamental research should not have technical analysis included.
- A long-only fund should not be pitched to a short stock.
- A long-term fund won’t be impressed by a thesis that revolves around beating the quarter.
- It is inappropriate to pitch a macro idea to a fundamental fund with concentrated positions.
- Value funds are not interested in growth ideas.
- A large-cap fund should not be pitched as a small-cap stock.
The guidelines have to be followed, it is evident. However, there are times when the rules are broken, resulting in a failed interview. Funds need to understand the purpose of their funds. You must not choose a stock that you are more knowledgeable about than your readers. Taking Apple as an example, pitching it would be difficult. The readers will still hold an opinion regardless of whether they are familiar with it or not. The most effective pitch is made for mid-cap stocks. You can provide your readers with a lot of value if you do a good amount of research on them. Likewise, midcap stocks can deliver a greater upside in the event your investment thesis proves correct.
Investing in Stocks: What Do We Do Next?
Stock pitches are no exception to the cliché “practice makes perfect”. For creating high-quality stock pitches, you’ll need to practice on a few companies before you get a sense of how to do it. For those of you who don’t know accounting or valuation, add several months for you to learn them. As long as you are willing to adjust your recommendations to the fund’s needs (for example, underweight a Short pick at a long-only fund), you should prepare 2-3 suggestions before interviews.
Anything Else You Should Mention About Stock Pitches?
In addition to including the above factors in your pitch, some books, guides, and articles recommend the following:
- Over time, how ownership has changed.
- What is the “crowdedness” of the trade, i.e., whether or not other funds are also investing, and the short interest?
- Historically, the stock has performed well.
- Volume and liquidity of the stock daily.
- Keeping the stock price stable when entering and exiting the position.
These are all points you can include in a longer pitch if you have time and resources. Unfortunately, Bloomberg access is needed to go into depth on these points, which isn’t feasible with a student or someone in finance who isn’t yet employed. A few of these considerations apply to on-the-job situations too. Essential, however, is presenting a trade idea to others to generate interest – not so critical if you’re making the trade in the real world.
In an interview, what are the best ways to pitch a stock?
- Each slide begins with a storyline that makes investment ideas coherent.
- By presenting well-thought-out ideas, particularly regarding valuation, catalysts, and how to mitigate risks.
- It’s imperative that you’re honest, open to feedback, and willing to be challenged by interviewers.
- Using excellent communication skills such as clear speech and appropriate body language will help you make a good impression.
As an employee working in Asset Management, Equity Research, Equity Sales, or Hedge Fund you may be asked to give a stock pitch. These firms apply this method to recruitment in the interview round to determine the candidates’ ability to communicate their ideas in the best possible way. In interview situations such as these, the stock pitch is vital since it’s literally what you do all day, and it helps differentiate you from other candidates. If you want to get a job at a hedge fund, you will also be asked to pitch a stock, often multiple times.
Frequently Asked Questions
1. What should I write in a stock recommendation?
Studying a stock’s price-to-earnings ratio is a common method of analyzing it. P/E ratios are calculated by dividing market value by earnings per share. A stock’s price is determined by its price-to-earnings ratio compared to that of its competitors and its industry.
2. What are My Recommendations for Stocks?
By analyzing the company from every aspect, a stock recommendation should be made according to its price. It’s possible that two of three scenarios may result in a profitable opinion.
3. How do You Determine a Good P/E Ratio?
In the S&P 500, the price-to-earnings ratio has averaged between 13 and 15 over the past ten years. The same applies to companies with earnings at 25 times earnings, which are above the S&P average with a P/E of 25. Investors anticipate a faster rate of growth for the company than the overall market.
4. Money can be a catalyst?
Although money plays a role in trade, it is just a catalyst for trade and has no intrinsic value. Understanding this may require examining the role of a catalyst. When it comes to chemistry, catalysts play a key role in chemical reactions, but they remain unchanged.
5. In What Sense is a Risk Catalyst Used?
Users in Catalyst can assign ratings to losses of resources, taking into account their impact and likelihood. The risk of the resource loss is calculated by dividing the Likelihood Rating Value (which varies from 1 to 10) by the Impact Rating Value (which varies from 1 to 10).
6. Why are Some Stocks Strong Buys?
Analysts recommend buying shares of a company that is expected to perform dramatically in the short- to mid-term based on analysis. Stocks with a strong buy rating are usually expected to gain 30 to 50% over the next 12 months, for example.
7. When is the Best Time to Buy Stocks?
9:30 a.m. to 11:30 a.m. and 10:30 to 11:30 a.m. Trading during the ET period often offers the largest moves in the shortest amount of time, making it one of the best hours of the day. Many professionals stop trading around 11:30 a.m. The reason for this is because fluctuations and volumes tend to taper off in that period.