Investment research firms

Financial Services Industry Training

Introduction to
Investment Research Firms

Saunders Learning LLC, Andover, KS
Saunders Learning Group, Group, LLC

Training from Saunders Learning Group
Saunders Learning Group provides a variety
of training programs, workshops and
seminars targeted to the financial services
industry.

Programs are available in a wide range of
topics, and we are specialists in developing
custom programs that are targeted to your
needs.

Contact the founder, Floyd Saunders at
316-680-6482 or at
floyd@floydsaunders.com for more
information.

Saunders Learning Group, LLC, Andover, KS
1

Topics
1. Meaning and Definition
2. Investment Research: The First Steps
3. Process of Investment Research
4. Methodology of Investment Research
5. Investment Research Resources
6. Types of Investment Research

Saunders Learning Group, LLC, Andover, KS Slide 2

Buy-Side Research
 Buy-side analysts ("buy-siders") work for money
management firms such as mutual funds, pension funds,
trusts and hedge funds.
 A buy-side financial report by analysts is exclusively for
portfolio and fund managers and other investment firms
that tend to purchase large portions of securities.
 The research determines whether the firm is in a position
to purchase shares on their own account.
 They are incentivised to identify investment opportunities
that will improve the net worth of the portfolio they work
for.
 Buy-side recommendations are not available to anyone
outside the firm.


Investment Research Firms
Provides retail and institutional investors with data and reports used to evaluate
Function the financial conditional of corporations for the purpose of making investments in
or exiting an investment position.
 Obtain information to conduct financial research on a a corporation
 Researchers develop earnings and cash-flow models of the companies they follow.
 This often includes: a company’s annual reports, SEC filings, and other information to
conduct a financial review of the company.
 Interview the corporation’s management team and examine operations to determine
how well (or poorly) a company is managed.
Example  Equity research analysts work on both the sell side and the buy side.
Activities  Sell-side researchers will work at an investment bank or independent research company.
A sell-side analyst will cover a specific group of companies, an analyst might cover 12 oil-
services companies, write reports and make presentations to the clients, which may
include investment managers
 A buy side analyst will work at a hedge fund or investment management company. An
analyst will probably follow 30 to 40 companies in two to three different industries. The
buy-side analyst focuses on suitability elements for the client involved.
 They don't publish their research like sell-side analysts do, but instead feed their
insights to the portfolio managers who are managing money for the client.
 Reports can range from two to three pages after a company's earnings to 10 to 15 pages
for a longer outlook piece.

Fidelity, Putman, T Rowe Price, Vanguard, Moody’s, Standard and Poor’s, Value Line.
Example Morningstar, Zack Investment Research, Schaeffer's Investment Research,
Companies Russell Investment, Argus,


Leading Investment Research Firms
 The leading independent Investment Research:
firms include:

 Almost all retail brokerage firms and most discount brokerage firms
either suggest their own investment research analysts reports or
provide research reports from the leading independent investment
research firms.


Investment Research
May be a division of a global
bank, an investment bank, or
Investment Bank an independent investment
research firm

Investment Banking Investment Research

Provides corporations and investors with a Provides analysis and recommendations on
wide range of financing and investing options corporations, and a wide range of investment
products, to determine buy and sell strategies.

Sales Small Business

Trading Mid-Size Corporate

Corporate Finance Corporate


Equity Research
 Equity Research is a study of stocks for the purpose
of investments.
 Equities or common stock comprises a big chunk in
a company’s capital. Shareholders need to know
whether to stay invested in the company or sell.
 For an individual, it is time consuming to do equity
research - that is to study the company, its financial
statements, products, management and take a
decision about investment.
 A research analyst does all of the research on
companies and makes recommendations to
investment managers on which stocks to buy or
sell. In the case of Morningstar, Moodys and
Standard and Poor’s (and others firms) this
information is made publically available.
 Purpose of equity research is to study companies,
analyze financials, and look at quantitative and
qualitative aspects and determine investment
choices.


Securities Research

 Securities research professionals are known most generally as "analysts," "research analysts," or
"securities analysts and are commonly divided between equity analysts (researching stocks and
their issuers) and fixed income analysts (researching bond issuers). Some analysts cover all of the
securities of a particular issuer, stocks and bonds alike.
 Securities analysts seek to develop, and communicate to investors, insights regarding the value, risk,
and volatility of a covered security, and assist investors to decide whether to buy, hold, sell, sell
short, or simply avoid the security in question or derivative securities.
 To gather the information securities analysts:
 review periodic financial disclosures of the issuer and other relevant companies,
 participate or listen in on management conference calls
 read industry news and use trading history and industry information databases,
 interview managers and customers of the issuer, and (sometimes) perform their own
primary research.


What Investment Research Means to You
 Investment Research is the process of gathering
information for the purpose of initiating,
modifying or terminating a particular
investment or group of investments.
 Investment Research can be defined very
broadly as a process that contains one or more
of the following:
 The results of research into a designated investment or its issuer .
 Analysis of factors likely to influence the future performance of a designated
investment or its issuer.
 Advice or recommendations based on those results and that analysis.
 "To invest successfully over a lifetime does not require a stratospheric IQ, unusual
business insights, or inside information. What is needed is a sound intellectual
framework for making decisions and the ability to keep emotions from corroding
that framework." Warren E. Buffet.
 Using sound research allows you to make better, less emotional decisions about
investing.


Roles of Investment Research

 The function of reviewing companies and writes
reports about their prospects, providing "buy"
“hold” or "sell" ratings.
 While the research division may or may not
generate revenue (based on policies at different
banks), its resources are used to assist traders
in trading, the sales force in suggesting ideas to customers, and investment
bankers by covering their clients.
 Research also serves outside clients with investment advice (such as institutional
investors and high net worth individuals) in the hopes that these clients will
execute suggested trade ideas through the sales and trading division of the bank,
and thereby generate revenue for the firm.
 Investment Research offers real-time access to comprehensive data and
independent analysis on thousands of investments, spanning mutual funds, stocks,
exchange-traded funds, and closed-end funds.
 Investment Research serves all levels of investors with a range of dynamic tools
and thoughtful perspectives to help them make more informed investment
decisions.
 Investment Research is useful to individual investors , high net worth Individuals,
asset management companies, economic analysts etc.


Investment Research: The First Steps
 The first step is determine if abusiness is public or private.
 Publicly traded companies have stock shares available for
purchase on the open market while private companies are
owned by a family, individual, or exclusive group of investors.
 Next step find the company’s ticker symbol. This symbol is used instead of
the company’s full name in the stock exchange.
 Use the ticker symbol to look up company information (Google or Yahoo
Finance or good sources.) this gives you: a quote for one share of stock,
price/earning ratio, and market cap.
 Now look up the company’s annual report, 10k, and proxy statement.
These documents tell everything an investor would want to know about a
company. Generally available from the company web site or the SEC site.

Slide 5 Confidential and Proprietary - UST

Public vs. Private
 Before invest in a business, determine if it’s public or private.
 A publicly traded company is one which has shares of stock
traded on the open market.
 Private companies, do not have shares available for public
purchase.
 Private companies may be owned by an individual, a family, a partnership, employees, or a
small group of investors.
 To illustrate the difference, consider Hershey and Mars, two of the largest candy companies
in the world. Hershey is publicly traded on the New York Stock Exchange
Top Ten Private U.S. Companies  An individual investor could take his pay
check and acquire shares in the
company, profiting from every Hershey
bar or Reese’s peanut butter cup sold.
 The multi-billion dollar Mars company is
owned by the Mars family.
 An investor could not buy shares unless
the members of the family allowed him
to acquire some of their closely held,
personal stock.


Ticker Symbol
Public companies are listed on stock exchanges and have a trading or ticker symbol.

A ticker symbol is a collection of Look up a company’s ticker symbol using an
2-5 letters that represent a online site, like Yahoo Finance.
particular stock on an exchange or
the over-the-counter market.
 Microsoft, for example, is
MSFT.
 Cisco Systems is CSCO.
 Berkshire Hathaway has two
ticker symbols, one for its class
A shares (BRKA) and one of
the class B shares (BRKB).
 Coca-Cola is KO.
 The Washington Post is WPO.


Investment Research: Company Basics
After pressing the “get quote” button, a summary page appears that includes:
 current quote for one share of the company’s stock, previous day’s closing price, current
bid and ask price and data on the day’s trading range, 52 week trading range and
 total market capitalization of the business,
 price-to-earnings ratio for the trailing twelve months
 recent dividend payment and yield information and other items of interest


Further Data collection
Obtaining Annual Reports, SEC Filings and other Financial Documents
 With the internet you can obtain
all sorts of financial information
on public companies.
 Free Edgar is a database of annual
reports and SEC filings.
 Or contact the shareholder
relations department of the
company and request
information.
 A research analyst will research
the companies press releases,
check public news sources
(Bloomberg News for example)
and contact other professionals.
 Finally a visit to company is
always needed to talk to
management and get a first hand
feel on company operations.


Process of Investment Research
Investment research for mutual fund, hedge fund, insurance company or bank’s
investment team includes several steps as shown below:

Due diligence in the form of investment research is done to help make informed investment decisions.
This included both fundamental and technical analysis. Fundamental analysis is used to find the best
companies to buy.
Technical analysis is used to determine the best buying selling points.


Process of Investment Research -
Fundamentals
Fundamental analysis essentially explains what
to buy while technical analysis could be used
to decide on when to buy.
Fundamental Analysis :
 Fundamental analysis is a method used
to determine the value of a stock by analysing
the financial data that is 'fundamental' to
the company.
 It takes into consideration only those variables that are
directly related to the company itself, such as its
earnings, its dividends, its sales and extends to a review
of the business operations and strength of the
management team.
 Fundamental analysis does not look at the overall state
of the market nor does it include behavioural variables
in its methodology.
 It focuses exclusively on the company's business in
order to determine whether or not the stock should be
bought or sold.


Fundamental Analysis

 Fundamental analysis determines the ’true’ or ’intrinsic’
value of any financial asset equals the present value of
all cash flows.
 A stock analyst attempts to forecast the timing and size
of these cash flows and then converts them into equivalent
present value by using an appropriate discount rate .
 Once the true value (or present value) is determined, it is
compared with the current market price of the asset in
order to see whether the asset is fairly priced.
 Companies price above the intrinsic value are said to be ’over valued’ and those whose prices
are lower than the intrinsic value are ’under valued’.
 To determine the intrinsic value, the financial statements of a company are analyzed. Other
factors such as its credit rating, business model, competitor parity of the company are also
thoroughly scrutinized.
 The end goal of performing fundamental analysis is to produce a value that an investment
firm or investor can compare with the security's current price, with the aim of figuring out
what sort of position to take with that security (underpriced = buy, overpriced = sell or
short).


Analysis of the Firm
 Annual report
 Balance sheet: a financial statement that indicates a firm’s sources of funds and
how it has invested its funds as of a particular point in time
 Income statement: a financial statement that measures a firm’s revenues,
expenses, and earnings over a particular period of time

Simple Balance Sheet and Income Statement

Analysis of the Firm – Balance Sheet

Balance Sheet (numbers are in millions)
 The balance sheet is the starting point for analysis of any corporation’s financials. Analysis of a firm’s income
statement and balance sheet can reveal the following characteristics:
 Liquidity
 Current ratio: the ratio of a firm’s short-term assets to its short-term liabilities. Show the firm’s ability to
cover expenses
 Financial leverage: a firm’s reliance on debt to support its operations
 Debt ratio: a measure of financial leverage that measures the proportion of total assets financed with
debt
 Times interest earned ratio: a measure of financial leverage that measures the ratio of the firm’s
earnings before interest and taxes to its total interest payments


 Efficiency
 Inventory turnover: a measure of efficiency; computed as the cost of goods
sold divided by average daily inventory
 Average collection period: a measure of efficiency; computed as accounts
receivable divided by average daily sales
 Asset turnover ratio: a measure of efficiency; computed as sales divided by
average total assets
 Profitability
 Operating profit margin: a firm’s operating profit divided by sales
 Net profit margin: a measure of profitability
that measures net profit as a percentage of sales
 Return on assets: a measure of profitability; computed as net profit divided by
total assets
 Return on equity: a measure of profitability; computed as net profit divided by
stockholder’s equity


Ratios Used to Analyze Financial Statements


Technical Analysis
Technical analysis is the study of stock market prices in an
attempt to predict the future price movements it may take.
Initially, past prices are examined in order to identify
recurring trends or patterns in price movements.
Then more recent prices are analyzed in order to identify
emerging trends or patterns that are similar to past ones.
This analysis is done in the belief that these trends or
patterns repeat themselves.
Thus by identifying an emerging trend or pattern, the analyst
hopes to accurately predict future prices and opportunities
to buy at the best price.
Technical analysis can also assist in determining selling
points.

Combination Technique
As can be seen, neither of the two methods is comprehensive. A synthesis of the two would be ideal rather
than any one, giving the investor information on what to buy and when to buy it.


Research Analysis
 The research analyst is a key player
in any investment company, as they
are tasked with following key
sectors of the stock markets and
performing analysis on all of the
companies they track.
 The output for research analysts
included research reports and
recommendations on when to buy
or sell companies they follow.
 Frequently investors will seek to
find the combined estimates of all
of the analysts following a specific
stock.


Methodology of Investment Research
Investment research is a scientific process that aims at finding out the value of an asset or
group of assets with the help of certain factors. These factors are listed below.

Earnings Quality
Assessment of earnings quality plays an important role in the investment research process.
In addition to extensive examination of a firm’s operating history, analysts may employ proprietary
measures.
For example, S&P Core Earnings is a proprietary methodology
that assesses a company’s underlying economic earnings power
by measuring earnings attributable to ongoing operations.
Technical Influences
Important technical considerations may include analysis of a stock’s
intermediate-term trend and its relationship to key moving averages.
Comparison with other stocks in the same industry also may lend
insight as to whether a shift in price is related to the industry or to the
individual security.
Principal Valuation Methods
Assets, liabilities, and shareholder equity are evaluated to determine if the firm has
sufficient resources to generate income and cash flow, as well as sufficient liquidity to
ensure continuity as a going concern.


Cash Flows
Discounted Cash Flow (DCF) Valuation
DCF or Discounted Cash Flow Valuation is a key
method to arrive at the intrinsic value of an asset.
Analysts create and maintain spreadsheet models
of both historical and projected financial statement
items.
 These projected income statements, balance sheets, and
cash flow statements are integrated with intrinsic value models for each company.
 Intrinsic value models attempt to determine the present value of projected cash
flows.
Cash Flows
The value of any security is the present value of its expected future cash flows. When
future cash flows are not known with certainty they must be estimated.
Free cash flow to the firm (FCFF) is net cash flow from operating activities minus capital
expenditures plus interest expense and sale of property, plant, and equipment.


Growth Rates
From the most recent free cash flow to the firm (FCFF), the analyst
estimates future growth rates to apply to those cash flows.
 Since DCF models are highly sensitive, providing quality growth
rate estimates is a primary challenge.
 To accomplish this, it is the analyst’s responsibility to gain
insight into industry trends and individual company business drivers.
 For example, in capital-intensive industries, results may be driven primarily by cost structure,
while for companies in emerging industries, future FCFF may depend on each company’s
product pipeline.
The sustainability of cash flows is heavily influenced by the competitive landscape. Important
issues for consideration include:
 the firm’s tax and regulatory environment,
 the level of market saturation,
 the presence of barriers to entry or exit,
 historical returns on equity and assets, and the strategic plan (whether the firm is a high-margin
or low-cost producer). The analyst’s goal is to assign probabilities to various outcomes based on
these considerations. These probabilities are used to arrive at growth rate assumptions.

Slide 18

Discount Rate
Another input to determining the present value of future cash flow is the
discount rate.
When valuing projected cash flows to the firm, the weighted average
cost of capital ( WACC) is typically used.
Using the WACC takes into account
the firm’s cost of capital for common
equity, preferred equity, and debt
financing, as well as the capital
structure of the balance sheet.

The cost of debt is usually the yield at which outstanding debt trades or
the risk free rate plus an appropriate credit spread.


Relative Valuation
 Combining the Inputs
 Once the future cash flows have been estimated, a discount
rate is applied to arrive at the present value of the firm.
 The present values of debt and preferred stock are then
deducted to obtain the present value of the firm’s equity,
its intrinsic value.
 If intrinsic value is well above current market capitalization, the stock would be
deemed attractive from a DCF perspective.
 Problems with Relative Valuation
 Some industries do not lend themselves well to DCF analysis.
 The value of companies in emerging industries depends largely on new products and those that may still
be in development.
 Many of companies may not have a history of generating any FCFF. The biotechnology industry is an
example.
 A company may generate profit from net margins (spread between assets& liabilities) not operating
activities.
 While the specific comparison metrics differ among industries, the principle remains that by comparing
a firm to its peers on industry-relevant measures of performance, the analyst can determine its relative
under- or over-valuation.


Investment Research Resources
There are many sources of investment research online or in print. These resources will help
you find free or subscription-based investment research for stocks, bonds, mutual funds,
and much more.

Annual Reports: All publicly traded companies issue an annual report to its shareholders. These
reports are the primary source of investment research and contain information about business
operations, finances, and management.
The Proxy Statement: Each year, the government requires publicly traded companies to provide
their stockholders with a proxy statement that such things as executive compensation, perks, and
other matters.
Financial News: Financial news, publication, television broadcasts are some of the sources of
investment research.
Government Filings: The most important part of investment research is a company's filings with the
SEC. Here you can find quarterly and annual reports as well as the 10K.
10K: A 10K is an annual filing that publicly traded companies are required, by law, to send into the
Securities and Exchange Commission explaining the company’s finances, risks, opportunities, and
current operations.
Market Analysis: Market analysis is concerned with economic indicators and market activity than
individual investment research.
Investing Newsletters : Investing newsletters can be an important part of investment research.

4 Things to Look for in an Investment
 New investors are often interested in purchasing a company's stock but
are not sure where to begin. These four characteristics should serve as
helpful guidelines in your search for a good investment.
 1. What is the price of the entire company?
When doing research, it is important that you look at more than just the
current share price - you need to look at the price of the entire company. The
"cost" of acquiring the entire corporation is called market capitalization (or
market cap for short) and is frequently referred to by financial professionals. In
short, the market cap is the price of all outstanding shares of common stock
multiplied by the quoted price per share at any given moment in time. A
business with one million shares outstanding and a stock price of $50 per
share would have a market cap of $50 million.
 2. Is the company buying back shares?
One of the most important keys to investing is that overall corporate growth is
not as important as per-share growth. A company could have the same profit,
sales and revenue for five consecutive years, but create large returns for
investors by reducing the total number of outstanding shares.



 3. What are your reasons for investing in the company?
Before you purchase stock in a company, you need to ask yourself why you are
interested in investing in that particular opportunity. It is dangerous to fall in
love with a corporation and buy it solely because you feel fondly for its products
or people - after all, the best company in the world is a lousy investment if you
pay too much for it.
Make sure the fundamentals of the company (current price, profits, good
management, etc.) are the only reason you are investing. Anything else is based
on your emotions; this leads to speculation rather than intelligent investing. You
have to remove your feelings from the equation and select your investments
based on the cold, hard data. This requires patience and the willingness to walk
away from a potential stock position if it does not appear to be fairly or
undervalued.



 4. Are you willing to own the stock for the next ten years?
If you aren't willing to buy shares in a company and forget about them for the
next ten years, you really have no business owning those shares at all. The
simple but painful truth of this is evident on Wall Street every day.
Professional money managers attempt to beat the Dow Jones Industrial
Average , which is a collection of 30 largely unmanaged stocks. Year after year,
they fail to do this. It seems impossible that a portfolio managed by the best
minds in finance can't beat an unmanaged portfolio of long-term stocks held
indefinitely.

The guaranteed way to success has historically been to select a great
company, pay as little as possible for the initial stake, begin a dollar cost
averaging program, reinvest the dividends and leave the position alone for
several decades.


Questions


Post Workshop Action Plan

 Complete the Post Workshop Action Plan

36

Thank You !

Saunders Learning LLC, Andover, KS
Saunders Learning Group, Group, LLC

About the Author/Presenter
 Floyd Saunders has worked on Wall Street
with both Bank of America and JPMorgan,
where is was a vice president in global
financial systems. He has worked across the
industry in retail, commercial, and
investment banking.
 He has taught courses in Money and Banking
and extensively for the American Institute of
Banking and various colleges.
 As a consultant, he developed and taught a
wide range of banking and investing courses.
 He authored three programs for the
American Bankers Association: Banking on
Mutual Funds and Annuities, Introduction to
Securities Markets and Investing in Securities.
 He is the author of “Figuring Out Wall Street”
and his next book is “Family Financial
Freedom” a book on personal money
management.


Reference Material

Figuring Out Wall Street Consumer’s Guide To
Financial Markets
By Floyd Saunders
Publisher: Saunders Learning Group

ISBN: 978-0-9824019-0-3

Available from Amazon:
http://www.amazon.com/Figuring-Out-Wall-Street-
Consumers/dp/0982401906
and many other online book stores.
Book summary: Figuring Out Wall Street, is the
concise guide to help everyone understand how what to do
now to restore our financial systems. Written in an easy to
understand manner, even the most complex financial
concepts are easy to digest. This book provides help to
monitor investments with a review of investment products,
financial regulators and economic indicators. Learn how the
stock market exchanges work and the world of investment
banking, hedge funds, venture capital and private equity.
Every chapter includes action plans for investing.


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