Investment research firms


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In this seminar we introduce participates to the role of the investment research firm and research analyst working for investment banks, research firms and some of the keys to performing investment research. Saunders Learning Group provided customized training to the financial services industry and seminars in personal money management to the general public. Contact us for a discussion on your training needs.

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Investment research firms

  1. 1. Financial Services Industry Training Introduction to Investment Research Firms Saunders Learning LLC, Andover, KS Saunders Learning Group, Group, LLC
  2. 2. 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 for more information. Saunders Learning Group, LLC, Andover, KS1
  3. 3. Topics1. Meaning and Definition2. Investment Research: The First Steps3. Process of Investment Research4. Methodology of Investment Research5. Investment Research Resources6. Types of Investment Research Saunders Learning Group, LLC, Andover, KS Slide 2
  4. 4. 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. Saunders Learning Group, LLC, Andover, KS
  5. 5. Investment Research Firms Provides retail and institutional investors with data and reports used to evaluateFunction 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 dont 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 companys 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, Schaeffers Investment Research,Companies Russell Investment, Argus, Saunders Learning Group, LLC, Andover, KS
  6. 6. 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. Saunders Learning Group, LLC, Andover, KS
  7. 7. Investment Research May be a division of a global bank, an investment bank, or Investment Bank an independent investment research firm Investment Banking Investment ResearchProvides corporations and investors with a Provides analysis and recommendations onwide 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 Saunders Learning Group, LLC, Andover, KS
  8. 8. 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. Saunders Learning Group, LLC, Andover, KS
  9. 9. 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. Saunders Learning Group, LLC, Andover, KS
  10. 10. 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. Saunders Learning Group, LLC, Andover, KS
  11. 11. 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. Saunders Learning Group, LLC, Andover, KS
  12. 12. 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. Saunders Learning Group, LLC, Andover, KSSlide 5 Confidential and Proprietary - UST
  13. 13. 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 ExchangeTop 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. Saunders Learning Group, LLC, Andover, KS
  14. 14. Ticker SymbolPublic 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. Saunders Learning Group, LLC, Andover, KS
  15. 15. Investment Research: Company BasicsAfter 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 Saunders Learning Group, LLC, Andover, KS
  16. 16. Further Data collectionObtaining 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. Saunders Learning Group, LLC, Andover, KS
  17. 17. Process of Investment ResearchInvestment research for mutual fund, hedge fund, insurance company or bank’sinvestment 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 bestcompanies to buy.Technical analysis is used to determine the best buying selling points. Saunders Learning Group, LLC, Andover, KS
  18. 18. Process of Investment Research -FundamentalsFundamental analysis essentially explains whatto buy while technical analysis could be usedto 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 companys business in order to determine whether or not the stock should be bought or sold. Saunders Learning Group, LLC, Andover, KS
  19. 19. 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 securitys current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short). Saunders Learning Group, LLC, Andover, KS
  20. 20. 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 Saunders Learning Group, LLC, Andover, KS
  21. 21. 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 Saunders Learning Group, LLC, Andover, KS
  22. 22. Analysis of the Firm  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 Saunders Learning Group, LLC, Andover, KS
  23. 23. Analysis of the FirmRatios Used to Analyze Financial Statements Saunders Learning Group, LLC, Andover, KS
  24. 24. 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 TechniqueAs can be seen, neither of the two methods is comprehensive. A synthesis of the two would be ideal ratherthan any one, giving the investor information on what to buy and when to buy it. Saunders Learning Group, LLC, Andover, KS
  25. 25. 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. Saunders Learning Group, LLC, Andover, KS
  26. 26. Saunders Learning Group, LLC, Andover, KS
  27. 27. Methodology of Investment ResearchInvestment research is a scientific process that aims at finding out the value of an asset orgroup 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. Saunders Learning Group, LLC, Andover, KS
  28. 28. Cash FlowsDiscounted 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. Saunders Learning Group, LLC, Andover, KS
  29. 29. 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. Saunders Learning Group, LLC, Andover, KSSlide 18
  30. 30. Discount RateAnother input to determining the present value of future cash flow is thediscount rate.When valuing projected cash flows to the firm, the weighted averagecost of capital ( WACC) is typically used.Using the WACC takes into accountthe firm’s cost of capital for commonequity, preferred equity, and debtfinancing, as well as the capitalstructure of the balance sheet.The cost of debt is usually the yield at which outstanding debt trades orthe risk free rate plus an appropriate credit spread. Saunders Learning Group, LLC, Andover, KS
  31. 31. 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. Saunders Learning Group, LLC, Andover, KS
  32. 32. Investment Research ResourcesThere are many sources of investment research online or in print. These resources will helpyou 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 companys 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. Saunders Learning Group, LLC, Andover, KSSlide 22 Confidential and Proprietary - UST
  33. 33. 4 Things to Look for in an Investment  New investors are often interested in purchasing a companys 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. Saunders Learning Group, LLC, Andover, KSSlide 25 Confidential and Proprietary - UST
  34. 34. 4 Things to Look for in an Investment  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. Saunders Learning Group, LLC, Andover, KSSlide 26 Confidential and Proprietary - UST
  35. 35. 4 Things to Look for in an Investment  4. Are you willing to own the stock for the next ten years? If you arent 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 cant 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. Saunders Learning Group, LLC, Andover, KSSlide 27 Confidential and Proprietary - UST
  36. 36. Questions Saunders Learning Group, LLC, Andover, KS
  37. 37. Post Workshop Action Plan  Complete the Post Workshop Action Plan Saunders Learning Group, LLC, Andover, KS36
  38. 38. Thank You !Saunders Learning LLC, Andover, KS Saunders Learning Group, Group, LLC
  39. 39. 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. Saunders Learning Group, LLC, Andover, KS
  40. 40. 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: 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. Saunders Learning Group, LLC, Andover, KS