Guide to Pitching a Stock

Joseph S. BurkhartDavid M. Khtikian

This tutorial was prepared as a final project for Advanced MC on 12/6/04

Overview

1. Generating an Idea

2. Gathering Research

3. Developing a Thesis

4. Pitching your Idea

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Idea GenerationWays to find a stock/company to analyze:• Articles, media, search engines, or a

company/product that sparks your interest– For links to sources, see Appendix A

• A company that you are familiar with– Previous employer, client, etc.

• Keep it simple!– Choose an easily understandable business with a

simple product line• I.E. if you pick a tech company, you should understand

what they do, why it is useful, and how they do it. This isn’t always easy

• Two Approaches: Top Down v. Bottom Up

Generating an Idea

Company Filings/Releases

• Preparation Tips– Read SEC filings (10-K, 10-Q and Proxy)– Read the most recent Annual Report

• Focus on the letter from the CEO and future goals• Does this company appear to be moving in the right

direction?– Read through recent press releases– Read/Listen to recent earning’s call

• GOAL: Try to gain an understanding of the main drivers of the company’s business model – Focus on revenue stability, real cash flow,

operational risks, customer risks, supplier issues, corporate governance and accounting assumptions

Gathering Research

How to Find Company FilingsCompany filings can be found on most company websites or also through the Darden

Library Link

Gathering Research

How to Find Company Filings

• Available Resources Through Darden Library– EdgarScan: pulls filings from the SEC's servers and parses

them automatically to find key financial tables and normalize financials to a common format that is comparable across companies. Using hyperlinks, users can go directly to specific sections of the filing, including the financial statements, footnotes, extracted financial data and computed ratios.

– SEC Info: allows users to search the SEC's EDGAR and the CSA's (Canadian Securities Administrators) SEDAR databases. Filings can be searched by company name, industry, topic, SIC code, zip code, area code, and more. Users can also browse filings by tape and by type.

– 10K Wizard: boasts expanded coverage and advanced search capabilities of the SEC database with real-time access and the unique ability to perform keyword searches on up-to-the-minute SEC filings.

Gathering Research

Sell-Side Research

• Where to find it:– Darden Library Online has access to Investext Plus– See Appendix B for a “How to” on accessing Investext

• What to use it for:– What are Wall Street Analysts thinking about this stock?

• What is common across all analysts and where is there disparity?

– Pro-Forma Financial Projections– Industry Information

• Growth rates, market share, organic growth v. growth through acquisition

• What NOT to use it for:– Buy/Sell Recommendation or Price Targets

• You need to form your OWN opinion on the stock

Gathering Research

Industry AnalysisApply Porter’s 5 Forces to your company

1. Rivalry2. Threat of Substitutes3. Buyer Power4. Supplier Power5. Barriers to Entry

Other Questions to Ask:• What has transpired in the industry over the years?

– Has this industry been growing/shrinking? • Who are the key players in the industry?• Has there been consolidation in recent years?

Use 10-K/10-Qs and Sell-Side research to find this information

Gathering Research

Competitors Within Industry

Comparing the market valuations for a company’s competitors is an important step in understanding the market’s valuation of the stock being pitched

Start with Yahoo! Finance Click on “Competitors”

Gathering Research

Competitors Within Industry

• Concepts – Figure out the set of “best” competitors

• When looking at competitors, why are the multiples “rich” or “cheap” compared to others?

• Is there a good reason for the disconnect?– Look at key metrics for comparison

• Sales growth, gross margin, debt ratios, ROE, ROA, ROIC, CapEx spending, earnings multiple, dividend yield

– Compare Multiples versus the comps• Which are most applicable for the industry/company?• Forward Multiples are more useful

– Price/Earnings, Price/EBITDA, Price/Sales– Refer to . . .

http://www.cityu.edu.hk/lib/instruct/guides/tutorial/cpstat.htm for Compustat Tutorial

Gathering Research

Developing a Strong Thesis

• Once you have compiled all of the research, develop your thesis by answering some of the following questions:

– Is there value or growth potential in the sector?– How does the company compare to its competitors?

• Keep the story simple and understandable as to why the fund should BUY, HOLD, or SELL the security

– Does it pass the “grandmother test”?• You should be able to explain the story of the investment to

anyone in a short amount of time and have it make sense• Things to include:

– Why is it a good company/story and why is NOW the time to BUY or SELL it?

– What is the disconnect between your valuation and where the market is currently pricing it?

– What catalysts or events need to occur for this stock to be re-priced by the market?

Developing a Thesis

Reaching a Price Target• Two most common types of valuation for

price target:1. Relative Valuation - multiple analysis2. Discounted Cash Flow Analysis (DCF)

– Link to examples and explanations of both types of valuation

• Multiple Analysis– Apply an estimated forward multiple to the current share price

• Idea is that either the EPS will grow more than the market expects or that the market will realize the value of the company and pay a higher price for the stock

• DCF– Discounting the projected free-cash flows that the company will

generate in the future• This requires preparation of a Pro-Forma income statement and balance

sheet for the company– Learned in FY Finance and in link above

Developing a Thesis

The Written Pitch• Purpose of written pitch is to summarize

analysis and to provide a framework to support your investment thesis

• Three important elements to consider when preparing your written stock pitch

1. Knowing your purpose2. Using the “Motivated Sequence” to effectively

persuade3. Standardizing the approach

Source: Darden Technical Note – Persuasive Correspondence (The Motivated Sequence)

Pitching Your Idea

The Written Pitch

Knowing Your Purpose

• Goal is convince and persuade the fund managers to BUY or SELL the stock that you are pitching

• Questions to think about:• What is your level of credibility and how

will the written pitch enhance it?• How can the information and analysis you

performed be presented to best convince the fund managers to concur with your thesis?

Pitching Your Idea

The Written PitchUsing the Motivated Sequence

• Attention Step – Capture interest by summarizing recommendation and stating investment thesis

• Need Step – Outline the specifics of the investment thesis and support with data

• Satisfaction Step – Counter any investment concerns with mitigants

• Visualization Step – How will the fund benefit from the investment

• Action Step – Summarize final investment recommendation for the reader

Source: Darden Technical Note – Persuasive Correspondence (The Motivated Sequence)

Pitching Your Idea

The Written Pitch

Standardizing the Approach• Use previous DCM pitches as an outline for

your pitch

Pitching Your Idea

The Oral Pitch• Do not underestimate the importance of the oral

presentation– Hard work and a detailed analysis will not be impactful

without a clear and well thought out presentation

• Three important elements to consider when preparing to present your oral stock pitch

1. Knowing your purpose2. Understanding your audience3. Selecting an appropriate message structure strategy

Source: Darden Technical Note – Thinking Strategically About Communication

Pitching Your Idea

The Oral PitchKnowing Your Purpose

• Goal is convince and persuade the fund managers to BUY or SELL the stock that you are pitching

Source: Darden Technical Note – Thinking Strategically About Communication

Pitching Your Idea

The Oral PitchUnderstanding Your Audience

• Your audience is the fund managers who you are trying to persuade

• Tailor your pitch toward your audience’s needs and interests

• How does this security fit into the overall portfolio and the investment approach• Do not try to pitch a large cap stock to a small cap fund or a

value stock to a growth fund• Accentuate the factors of the company that are most important

to the managers

• Think about the manager’s concerns - this will help you to prepare for questions that will arise during and after your pitch

Source: Darden Technical Note – Thinking Strategically About Communication

Pitching Your Idea

The Oral PitchSelecting an Appropriate Message Structure Strategy

• Direct Approach: State the recommendation (BUY/SELL) first and then support that recommendation throughout the pitch

• Preferred approach because it emphasizes the result

• Indirect Approach: Provide the support first and build to the recommendation

• This is NOT effective in this forum as the audience needs to know your position on the security

• Communicate to PERSUADE, Not to Inform: Realize that you are convincing the managers to purchase your security. Do not just give them the information regarding the company. Persuade them to buy it by showing them the potential benefits.

Source: Darden Technical Note – Thinking Strategically About Communication

Pitching Your Idea

Appendix A – Idea Sources

• Wall Street Journal• Bloomberg Columnists -

www.bloomberg.com/news/commentary/columnists.html• Barron’s Online – www.barrons.com• Bloomberg’s Equity Search Function

1. Login to Terminal in the Library’s Capital Markets Room2. Type in {QSRC} and hit the GO key3. Create a new search based on your own constraints

– Search by industry, size, multiples, etc.

• Industry Specific Magazines or Websites

Return to Idea Generation

Appendix B – Investext1) Select “Company/Industry Information” from the

Darden Library Homepage

Appendix B – Investext

2) Select “Analysts’ / Market Research Reports”

Appendix B – Investext

3) Select “Investext Plus”

Appendix B – Investext

4) Select “Access Investext Plus Now”

Appendix B – Investext

5) Click “Proceed” and then enter ticker of Security

Return to Sell Side Research Slide