Writing an Equity Research Report


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An overview of the process of producing an equity research report. I use these slides as part of specialist training and coaching.

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  • Writing an Equity Research Report

    1. 1. Welcome to Writing an equity research report Alan Barker Kairos Training Limited www.kairostraining.co.uk
    2. 2. Vital statistics: your reports in the market <ul><li>A large investment broker </li></ul><ul><li>prints about 1,000 pages of research </li></ul><ul><li>and about 1,000 pages of </li></ul><ul><li>electronic research each week. </li></ul>
    3. 3. Vital statistics: your reports in the market <ul><li>A large fund management house receives 7,000 envelopes of research in the mail every Monday morning. </li></ul>
    4. 4. The need to be unique <ul><li>You are probably competing with up to 500 different brokers and research houses for your reader's attention. </li></ul><ul><li>Every has access to the same information (presumably). </li></ul>
    5. 5. The need to be unique <ul><li>What will make your report stand out? </li></ul>
    6. 6. Time constraints <ul><li>We’re all busy. </li></ul><ul><li>Yet our reports are a vital element in our client relationships. </li></ul><ul><li>How long do you have to create your report? </li></ul>You have longer than you think!
    7. 7. Why are you writing? <ul><li>Writer </li></ul><ul><li>You've been told to </li></ul><ul><li>You are required to inform </li></ul><ul><li>You want your clients to deal </li></ul><ul><li>Client </li></ul><ul><li>An investment idea </li></ul><ul><li>Market perspective </li></ul><ul><li>In-depth analysis </li></ul><ul><li>Valuation tools </li></ul><ul><li>Impression of direct contact with corporate management </li></ul>
    8. 8. Why do reports fail? <ul><li>Client </li></ul><ul><li>The reader gets lost </li></ul><ul><li>Story-telling </li></ul><ul><li>Too much detail </li></ul><ul><li>Repeated information </li></ul><ul><li>Sentences too long </li></ul><ul><li>Lack of structure </li></ul><ul><li>Incoherent logic </li></ul><ul><li>Writer </li></ul><ul><li>Lack of time </li></ul><ul><li>Delayed information </li></ul><ul><li>Ambiguous information </li></ul><ul><li>Managerial or peer </li></ul><ul><li>interference </li></ul><ul><li>Lack of focus </li></ul><ul><li>Confusion between research </li></ul><ul><li>and report writing </li></ul>
    9. 9. An effective research report: <ul><li>persuades the client to deal </li></ul>
    10. 10. An effective research report: <ul><li>delivers a clear investment idea </li></ul><ul><li>structures its argument clearly </li></ul><ul><li>expresses itself concisely </li></ul>
    11. 11. An effective report does not: <ul><li>tell the client simply what happened </li></ul><ul><li>give the definitive history of the subject </li></ul><ul><li>act as PR for the company </li></ul>
    12. 12. The challenge <ul><li>A high quality report </li></ul>vs Time constraints
    13. 13. How to square the circle? <ul><li>Adopt a systematic approach </li></ul><ul><li>Planning </li></ul><ul><li>Drafting </li></ul><ul><li>Editing </li></ul>
    14. 14. What’s the big idea? <ul><li>Doing the research </li></ul>Writing the report Doing the research is not writing the report. data information idea Investment idea Supporting idea Supporting idea Supporting idea
    15. 15. Doing the research <ul><li>Know the company . </li></ul><ul><li>Know the industry . </li></ul><ul><li>Know the government views about company and industry (national and international). </li></ul><ul><li>Know what the market thinks about the company and the industry. </li></ul><ul><li>Know what your clients are looking for in terms of investment ideas. </li></ul>
    16. 16. Doing the research <ul><li>Know the company . </li></ul><ul><li>Its accounts </li></ul><ul><li>Its products and services </li></ul><ul><li>Its management </li></ul><ul><li>Its selling practices </li></ul><ul><li>How well it manages its own business </li></ul><ul><li>Its relations with customers and suppliers </li></ul><ul><li>Its R&D capacity </li></ul>
    17. 17. Doing the research <ul><li>Know the industry . </li></ul><ul><li>Customers </li></ul><ul><li>Competitors </li></ul><ul><li>The international picture </li></ul><ul><li>The emerging names and new entrants </li></ul><ul><li>New trends, products, innovation </li></ul><ul><li>Who is in trouble and why </li></ul>
    18. 18. Doing the research <ul><li>Know what the government thinks about the company and the industry. </li></ul><ul><li>Political developments </li></ul><ul><li>Power shifts </li></ul><ul><li>New regulations </li></ul><ul><li>The international political dimension </li></ul>
    19. 19. Doing the research <ul><li>Know what the market thinks about the company and the industry. </li></ul><ul><li>What’s the current majority position? </li></ul><ul><li>Where are the minority reports? </li></ul><ul><li>Who is right and who is wrong? </li></ul><ul><li>Why? </li></ul><ul><li>How come you know better than the market? </li></ul>
    20. 20. Doing the research <ul><li>Know what your clients are looking for in terms of investment ideas. </li></ul><ul><li>Their strategy </li></ul><ul><li>Their recent successes and failures </li></ul><ul><li>Their mood </li></ul>
    21. 21. Assessing risk <ul><li>You must assess the risks associated with your investment idea. </li></ul><ul><li>Assess: </li></ul><ul><li>economic risks </li></ul><ul><li>liquidity risks </li></ul><ul><li>political, legal, and environmental risks </li></ul><ul><li>business and management risks </li></ul><ul><li>financial risks </li></ul>
    22. 22. The birth of an investment idea What are the market’s assumptions? Do I have new information? Do I disagree with market assumptions? Do I believe the market’s assessment of risk/reward? What is the key question arising from my position? Answer: My message What is it worth? Where is it going?
    23. 23. Characteristics of an effective message <ul><li>a sentence </li></ul><ul><li>expressing a single idea </li></ul><ul><li>no longer than 15 words long </li></ul><ul><li>self-explanatory to the reader </li></ul><ul><li>Use a verb </li></ul><ul><li>Avoid local </li></ul><ul><li>humour </li></ul><ul><li>Keep it short </li></ul>
    24. 24. Thinking about planning <ul><li>You can structure your ideas using a logical process. </li></ul><ul><li>Your thinking must be unique. </li></ul><ul><ul><li>What marks you out from </li></ul></ul><ul><ul><li>the competition? </li></ul></ul><ul><ul><li>What will make your client take notice? </li></ul></ul>
    25. 25. Grouping and summarising <ul><li>Report formats are designed to help you group and summarise ideas. </li></ul><ul><li>- front page: headline; ‘black box’; summary paragraphs </li></ul><ul><li>- margin comments </li></ul><ul><li>- headings and sub-headings </li></ul><ul><li>Designing the structure first will save you time and improve the quality of the report. </li></ul>
    26. 26. Anatomy of a front page Headline: investment idea summary of investment case Key data Key points
    27. 27. Organising ideas coherently <ul><li>Message </li></ul>New question: Why? Key point Key point Key point Key point
    28. 28. SPQR: useful for introductions <ul><li>Situation What does the reader know? </li></ul><ul><li>Problem What has changed? </li></ul><ul><li>Question What would the reader ask you as a result? </li></ul><ul><li>Response Your message </li></ul>
    29. 29. Argument: core techniques <ul><li>Deductive </li></ul><ul><li>Inductive </li></ul>You should buy if the market is failing to factor element x into McCrackle’s share price. The market is failing to factor element x into McCrackle’s price. Buy McCrackle. (and) (therefore) You should buy McCrackle. McCrackle’s new risk mitigation system is not factored into its current price. McCrackle is improving its debt profile rapidly. McCrackle is expanding into profitable markets.
    30. 30. Explanation: six types <ul><li>Examples </li></ul><ul><li>Categorisation </li></ul><ul><li>Process </li></ul><ul><li>Definition </li></ul><ul><li>Cause and effect </li></ul><ul><li>Comparison and contrast </li></ul>
    31. 31. Drafting: top tips <ul><li>Write quickly. </li></ul><ul><li>Write in your own voice </li></ul><ul><li>Write without interruption. </li></ul><ul><li>Write without editing. </li></ul><ul><li>Keep to the plan of your outline. </li></ul>
    32. 32. Why edit? <ul><li>To make reading easier </li></ul><ul><li>To create quality more quickly </li></ul><ul><li>Because you must </li></ul><ul><li>(you can’t get it right first time) </li></ul>
    33. 33. Editing efficiently <ul><li>Edit on three levels: </li></ul><ul><li>- paragraph </li></ul><ul><li>- sentence </li></ul><ul><li>- word </li></ul><ul><li>Use a colleague </li></ul><ul><li>Take a break </li></ul>
    34. 34. Readability statistics <ul><li>Instantly indicate the quality of your writing </li></ul><ul><li>Give an objective measure of quality </li></ul><ul><li>Not absolutely reliable </li></ul><ul><li>For more, go to: </li></ul><ul><li>http://justwriteonline.typepad.com/just-write-online/ </li></ul><ul><li>- and find [ctrl+F] ‘Readability’ </li></ul>
    35. 35. Effective paragraphs: four characteristics <ul><li>Unity </li></ul><ul><li>Topic sentence </li></ul><ul><li>Coherent support </li></ul><ul><li>Adequate development </li></ul>
    36. 36. Unity <ul><li>A paragraph should be about one topic </li></ul><ul><li>A topic (Greek topos , ‘place; location’) is your position on the subject of the paragraph: your point of view </li></ul><ul><li>What do you want to say about the subject? </li></ul>
    37. 37. Topic sentences <ul><li>Key characteristics: </li></ul><ul><ul><li>Single idea </li></ul></ul><ul><ul><li>What you want to say about the paragraph’s subject </li></ul></ul><ul><ul><li>15 words maximum </li></ul></ul><ul><li>In a draft paragraph, look for a potential topic sentence at the end </li></ul>
    38. 38. Coherent support <ul><li>Create coherence by using transitional devices </li></ul><ul><li>For a list of transitional devices, go to: </li></ul><ul><li>http://owl.english.purdue.edu/owl/resource/574/02/ </li></ul>
    39. 39. Coherent support <ul><li>Use the topic sentence to identify how you will develop the topic. </li></ul><ul><li>Are you arguing or explaining in the paragraph? </li></ul><ul><li>What type of argument or explanation are you using? </li></ul><ul><li>- argument : deductive or inductive? </li></ul><ul><li>- explanation : which of the six types? </li></ul>
    40. 40. Adequate development <ul><li>To develop your topic adequately : </li></ul><ul><li>lay out the terms of the argument (deductive or inductive) </li></ul><ul><li>use examples and illustrations </li></ul><ul><li>cite data (facts, statistics, evidence, details, and others) </li></ul><ul><li>quote testimony (what other people say or write) </li></ul><ul><li>use an anecdote or story (but keep it brief) </li></ul><ul><li>define terms </li></ul><ul><li>compare and contrast </li></ul><ul><li>explain causes and reasons, or effects and consequences </li></ul><ul><li>offer the chronology of an event </li></ul>
    41. 41. Editing paragraph sequences <ul><li>Topic sentences should make sense in order </li></ul><ul><li>Use topic sentences as </li></ul><ul><ul><li>Margin summaries </li></ul></ul><ul><ul><li>Sequence of sentences </li></ul></ul><ul><ul><li>in the summary black box </li></ul></ul><ul><ul><li>Supporting text for graphics </li></ul></ul>
    42. 42. Managing your sentences <ul><li>Follow the ‘15-25’ rule </li></ul><ul><li>15 words maximum for all messages, key points and topic sentences </li></ul><ul><li>25 words maximum for all other sentences </li></ul>
    43. 43. Deal with long sentences by: <ul><li>cutting long sentences into separate sentences </li></ul><ul><li>separating ‘multiple’ sentences </li></ul><ul><li>cutting down long sentences </li></ul><ul><li>making non-sentences grammatically correct </li></ul><ul><li>finding strong subjects and verbs </li></ul>
    44. 44. Plain English <ul><li>Make your average sentence length 15 to 20 words. </li></ul><ul><li>Use only the words that your reader is most likely to understand. </li></ul><ul><li>Use only as many words as you need. </li></ul><ul><li>Use the strongest, clearest and most specific verbs you can. </li></ul><ul><li>Say what you mean. </li></ul><ul><li>Punctuate clearly and simply. </li></ul>
    45. 45. Active and passive verbs <ul><ul><li>Active verbs are: </li></ul></ul><ul><ul><ul><li>usually shorter </li></ul></ul></ul><ul><ul><ul><li>easier to understand </li></ul></ul></ul><ul><ul><ul><li>more direct expressions of who did what </li></ul></ul></ul><ul><ul><li>The stock has been purchased by the investor. </li></ul></ul><ul><ul><li>The investor has purchased the stock. </li></ul></ul><ul><ul><li>It is anticipated that additional monitoring may be needed . </li></ul></ul><ul><ul><li>We anticipate that managers may need to monitor progress further. </li></ul></ul>
    46. 46. Abstract nouns <ul><li>Watch for standard endings </li></ul><ul><li>- ion </li></ul><ul><li>-ment </li></ul><ul><li>-ance </li></ul><ul><li>-ence </li></ul><ul><li>- ity </li></ul><ul><li>-ure </li></ul><ul><li>-al </li></ul><ul><li>-age </li></ul>Convert to verbs or adjectives
    47. 47. Abstract nouns <ul><li>I shall make my decision on Friday. </li></ul><ul><li>>> </li></ul><ul><li>I shall decide on Friday. </li></ul><ul><li>The measurement of results will begin on Monday. </li></ul><ul><li>>> </li></ul><ul><li>We shall begin to measure results on Monday. </li></ul><ul><li>It is my responsibility to monitor progress. </li></ul><ul><li>>> </li></ul><ul><li>I am responsible for monitoring progress. </li></ul>
    48. 48. Bringing your writing to life <ul><li>Be precise </li></ul><ul><li>Use numbers sparingly </li></ul><ul><li>Qualify general statements with specific information </li></ul><ul><li>Look forward </li></ul><ul><li>Indicate catalysts for change </li></ul>
    49. 49. Using numbers <ul><li>Use numbers very sparingly. </li></ul><ul><li>Use no more than one number in any topic sentence of a paragraph. </li></ul><ul><li>Try to use no more than two or three numbers in any other sentence. </li></ul>
    50. 50. Using numbers <ul><li>Always subordinate numerical information to a non-numerical idea. </li></ul>Used vehicle prices have almost certainly turned the corner. According to the Manheim Index, prices rose 0.7% in November, reversing a nine-month decline.
    51. 51. Explaining risk <ul><li>You mustn’t evade your responsibility to clarify the risks associated with your investment idea. </li></ul><ul><li>Consider placing risks together in a clearly headed section – probably towards the end of the report. </li></ul><ul><li>Explain: </li></ul><ul><li>economic risks </li></ul><ul><li>liquidity risks </li></ul><ul><li>political, legal, and environmental risks </li></ul><ul><li>business and management risks </li></ul><ul><li>financial risks </li></ul>
    52. 52. Keeping it legal <ul><li>unsubstantiated rumours </li></ul><ul><li>unsubstantiated reports </li></ul><ul><li>flamboyant, gambling or tasteless language </li></ul><ul><li>possible compromised analysis </li></ul><ul><li>front-running </li></ul><ul><li>pre-announcements </li></ul><ul><li>promissory wording </li></ul>Avoid:
    53. 53. Want to know more? <ul><li>We regularly run workshops for equity analysts on this important skill. </li></ul><ul><li>For more information, please contact us through our website: </li></ul><ul><li>www.kairostraining.co.uk </li></ul>