I’ve written over 30,000 words detailing what it’s like to have an investing career. I’ve laid out the step-by-step process on how to get a hedge fund job for both experienced professionals and MBAs. What’s the one key takeaway from these guides? Having a killer stock pitch is what matters the most.
Making a strong stock pitch is the way to get your foot in the investment industry. It’s how you can become a professional investor.
Let’s go into the stock pitching process in detail.
This is a deep dive into analyzing and pitching stocks. We’ll go over how to screen for stocks, develop an investment thesis, analyze the company and industry, value the business, and assess the catalysts and risks.
A lot is taught on investing theories and frameworks in school. But little is said about how investment analysts actually pitch a stock.
If you’ve ever taken a finance class, you’ve probably left wondering: how do I actually put together a stock pitch the way professional investors do?
Why is the Stock Pitch So Important?
Let’s first go over the purpose of a stock pitch.
A stock pitch is a summary of an investment idea or opportunity, long or short. Both buy side and sell side equity analysts write pitches to initiate discussions on a potential investment.
When you apply for investment jobs, stock pitches are essential components of your interviews. It determines whether you get the job.
Most of what investment professionals do is written. A Good stock pitch articulates the investment thesis to the portfolio manager in a succinct and convincing manner.
Who is This Stock Pitch Guide For?
Why should you care about this guide and spend the next 15 minutes of your life away from Facebook / Instagram / Snapchat? You should care if you are:
- Keen to know how professional investors pitch stocks.
- Passionate about investing and want to improve your own investment process.
- Preparing for your investment job interviews.
- Networking with investment professionals.
- Preparing for a stock pitch for your investment club.
- Entering a stock pitch competition.
- Currently on the buy side and want to improve your pitching skills.
OK, let’s get started.
A Sample Stock Pitch
Before we begin, download this sample pitch. It’s a concrete example of the sections we’ll go through.
I prepared the sample pitch in 2013 on a company called Spansion, which is a technology company that produced specialty flash memories.
Spansion was trading at $11 per share at the time of the pitch. The company was subsequently purchased by Cypress Semiconductor at the end of 2014 for $25 per share.
The sample stock pitch is for educational purpose only, and should not be used as investment advice.
Stock Pitch Structure
An investment pitch has 6 essential sections:
Stock Summary: Key stock data at the top of the pitch to frame the investment idea. Followed up a 1-2 sentence summary of your investment thesis and price target.
Company Background: A brief description of the company’s business model and attractiveness. Talk about its industry position, product portfolio, points of differentiation, business segment, geographical exposure, competitors, customers, and suppliers.
Investment Thesis: Why is this company worth investing in? Typically, there are 3 major aspects to driving a stock’s upside: the company’s quality, upcoming catalysts, and valuation. Is it a high-quality business that will generate superior returns over competitors in the long-run? Does it have upcoming catalysts that likely lead to an earnings beat? Is the company undervalued compared to peers? Use these questions as starting points to form an investment thesis. Furthermore, focus on how your assumptions are different from others’. What do you see in the company’s quality, catalysts, and valuation that sell-side analysts don’t see?
Catalysts: Which are the upcoming events that would drive the stock closer to your target price? We’ll give examples of catalysts, and distinguish hard vs. soft catalysts.
Valuation: Present your model and explain your assumptions. Demonstrate that the company is either undervalued for a value pitch, or is reasonably valued for a quality-at-reasonable-price pitch.
Risks: What can go wrong that would negate your investment thesis ? Every investment is a calculated risk, and for every potential upside, there’s a possible downside. Talk about these risks one by one to show that you’ve considered them.
Length of the Stock Pitch
Stock pitches are word documents that typically range from 4 to 20 pages. The document length depends on the purpose of the pitch.
More often than not, keep the pitch short and succinct. Keeping your stock pitch short forces you to distil your investment idea down to its essentials. Be concise. Keep your pitches two to three pages long.
On the other hand, if you are presenting this pitch to showcase your investment skills, go for the long form. This includes interviews, stock pitch competitions, and investment presentations.
For the long-form, develop a powerpoint presentation and include all your analyses and exhibits. Demonstrate all of your knowledge of the industry trends, competition, unit economics, returns on capital, valuation, comparative analysis, risks, and follow-up items.
When you are on the job as an investment analyst, the length of your pitch varies. It depends on your portfolio manager’s style. Some like long, detailed case studies similar to what’s being used in private equity. Some like short emails with just the bullet points. Cater to your portfolio manager’s style.
Developing the Investment Idea
How do you find an investment idea to pitch? There are three primary sources to find potential investment ideas.
1. Your own expertise in an industry or region. For example, if you are an analyst in a group that covers healthcare, you’ve probably already discovered a few gems in healthcare through your work. Or, if you understand China better than most, you’ll have an edge in picking out potential investments there.
2. An investment screen that filters by certain metrics.
For example, let’s say you want to find cheaply valued mid-cap stocks. You can build a screen that filters out stocks with $1 to $10 billion dollar market cap, and sort by low P/E and P/B. If you are looking for growth stocks, you would sort by earnings growth rate and earnings momentum. If you have paid access to Bloomberg, CapitalIQ, or FactSet, use those. For free access, FinViz provides an excellent screen.
3. Online research portals. Sharing investment ideas online has become popular over the past few years. Portals like SumZero, GuruFocus, and the Value Investors Club are great sources for inspirations.
Know Your Audience
If you are interviewing for a fund, make sure the pitch is consistent with the fund’s portfolio’s investment philosophy. For example, here are the “don’ts” of pitching:
- Don’t include technical analysis for a fund that does only fundamental research.
- Don’t pitch a short stock to a long-only fund.
- Don’t pitch a thesis based on beating the next quarter to a long-term focused fund.
- Don’t pitch a macro idea to a fundamental fund with concentrated positions.
- Don’t pitch a growth idea to a value fund.
- Don’t pitch a small cap stock to a large-cap fund.
These guidelines sound obvious, and they are. But you’d be surprised by how often the rules get broken and result in failed interviews. The key is in to understand your fund’s objective well.
Most importantly, don’t pick a stock that your readers would know better than you do. For example, it’d be difficult to make a good pitch on bellwether stocks like Apple. Regardless whether your readers know it well, they will have a strong opinion on it.
Mid-cap stocks, on the other hand, make for much better pitches.
They are less well-understood, and you can add a lot of value to your readers by doing good research.
Mid-cap stocks tend to have more upside as well if your investment thesis turns out to be correct.
Section 1: Stock Summary
Provide a summary of key company data at the top of your pitch. Lay out the following data in a table:
- Current Share Price
- Your Price Target
- % Upside
- Market Capitalization
- Enterprise Value
- EV/EBITDA or P/E
- Historical Share Price Range
Having these data quickly frames your idea and makes it easy for you to reference later.
Next, have a succinct paragraph to summarize your recommendation. State whether you recommend to long or short with your target price and % upside from current price.
Section 2: Company Background
The next section is the company background. It has 2 parts: a short description of the business and a summary of industry trends.
You might be compelled to include a lot of details on your company and industry description. You’ve done a lot of company research, and there’s so much to mention!
It’s hard, but refrain from becoming the company historian. A couple sentences on the company is all you need. Same for the industry trends. Only provide the essential information.
We want to focus our attention on the investment thesis rather than what the company does. Unlike in private equity and investment banking, the 80/20 rule is particularly important to investment analysts. Be efficient with your time.
Section 3: Investment Thesis
Your investment thesis should answer this question: why is this company worth investing in?
Typically, there are three major elements that drive a stock:
- Busines quality
- Upcoming catalysts
Your investment thesis should center on at least one of these three elements. These elements form the basis for the three fundamental investing styles:
- Quality at a Reasonable Price (GARP): The company’s superior quality drives stable and consistent earnings growth over time.
- Growth: Upcoming catalysts would generate positive earnings revisions and stock momentum.
- Value: Cheap valuation that allows you to buy the stock at a discount.
To develop your investment thesis, ask yourself these questions about the company:
- Is it a high-quality business that will generate superior returns over competitors in the long-run?
- Does it have upcoming catalysts that likely lead to an earnings beat?
- Is the company undervalued based on the discounted value of its cash flows or compared to peers?
Use these questions as starting points to form an investment thesis.
Your investment thesis should be enticing. Grab the reader’s attention and get them excited quickly.
Your reader’s first thought have should be: “reading this could potentially lead me to make money.”
Investment Thesis Examples
Here are some examples of good investment theses:
Quality growth: “Five Scout is a consistent secular grower with a dominant position in a niche SaaS space. Because of its highly defensible position, the stock has 20% upside with an attractive risk/reward ratio of 2.5x.”
Value stock: “I recommend to long Advanced Auto Parts because of a temporary market decline in the aftermarket auto parts industry. the company’s a strong franchise with an attractive valuation that faces near-term market inflection.”
Deep-value cigar butt: “Medtech has 30% upside due to a misunderstood acquisition. It has been a consensus downgrade by sell-side research analysts, which does not understand the potential cost synergies between Medtech and Houda Pharma.”
Masked fundamentals: “Takita Group is a short with 50% downside. Its organic growth is declining because of fundamental market deterioration. However, the company is masking its weakness with a slew of acquisitions and aggressive accounting practices.”
Irrational exuberance: “Pogo Games is an overvalued business with a single over-hyped product. Its valuation of 500x P/E will not be sustainable in the coming months due to competitors with imitator products coming to the market.”
Have a Contrarian View
Next, support your investment thesis with contrarian research.
Developing contrarian views to support your investment thesis is important. If the stock is not currently trading at its fair value, then the rest of the market must not realize something about the company that you realize.
If everyone agrees with what you’ve concluded, then they should be buying or shorting the stock already. Then there won’t be any potential gains for you.
Perhaps the market doesn’t appreciate the quality of the business as much as you do. Or maybe it has doubts have its upcoming catalysts. Or the market might not be valuing the company correctly.
To answer these questions, first, you must find out what the market is thinking.
Find out the market consensus by reading sell-side equity reports, news, industry resources, etc. Talk to others who know the stock well to get their views. Get a clear picture of how others are thinking.
How to Develop Contrarian Views
Be critical when you are gathering market consensus. As you take in a view from a report or discussion, think to yourself: “do I agree with what this person is saying?”
This is how you do contrarian research. Write down your contrarian views to support your thesis.
For example, let’s say that your investment thesis centers on the company being undervalued.
You read through the sell-side reports and speak to your industry colleagues about the stock. You find out that they don’t realize that the company’s product is in a higher growth niche of the end-market. The company’s growth should be higher than the industry average growth. This is a contrarian view.
Furthermore, after researching deeper into the industry, you begin to appreciate that customer relationships and services matter a lot more in this industry, rather than just the price of the product. The company’s superior customer services should gain market share from competitors. You’ve developed another contrarian view.
You include all of these assumptions in your model, which produces a fair value that’s 20% higher than the current stock price.
Your conviction has led you to an attractive investment based on contrarian research.
Section 4: Catalysts
Catalysts are foreseeable events that would help the market realize where it’s been wrong on the stock. The most common form of a catalyst is the company’s upcoming earnings release.
For its quarterly earnings, a company would release a new set of data and give a quarterly business update.
Let’s go back to our examples above. If a company’s products are indeed in a higher growth niche, the above industry average growth would start showing through the company’s income statement. This would result in the company beating the market consensus for its sales, and the stock would appreciate.
If the company indeed has superior customer service, it would show through the company’s announced market share gain. The stock would go up as well.
Catalysts are important because they drive the stock price up or down to your target price.
Without catalysts, a stock can be overvalued or undervalued for a long time. Even if you were right about the company’s quality or valuation, you still won’t make money without catalysts.
Hard vs. Soft Catalysts
Another important idea is to pick “hard catalysts”. What’s the difference between a hard catalyst and a soft catalyst?
Hard catalysts are events that must happen. Soft catalysts are events that might (or might not) happen.
Take our first example above. The disclosure of the company’s growth rate is a hard catalyst. A public company in the U.S. must disclose revenue and earnings growth each quarter. Higher revenue growth next quarter is a hard catalyst.
Let’s look at our second catalyst. Confirming whether a company is gaining market share is a soft catalyst. The company might or might not directly disclose its market share in its SEC filings or on its earnings call.
The company might give a periodic update on its market share, but the timing of the update is uncertain.
When developing your catalysts, always prioritize hard catalysts over soft. Pick 2 – 3 catalysts to support your investment thesis.
Examples of Catalysts
Here’re other examples of hard catalysts:
When a biotech company’s cancer drug is undergoing clinical trials, the drug’s approval will be a binary event.
When an industrial conglomerate acquires a smaller specialty chemical business, the regulatory approval would happen within a certain time frame.
And here are more examples of soft catalysts:
A U.S business is expected to expand internationally, but the timing is uncertain. For example, L Brands, the holding company of Victoria’s Secret, has been expected to expand to Asia for the past few years. However, the speed of expansion has been slower than expected.
A business is trading at a discounted P/E and is cheap vs. peers. However, it’s hard to count on the P/E multiple to “re-rate” without other hard catalysts. A company’s P/E would not re-rate unless its fundamentals improve.
Catalysts to Short Stocks
Catalysts are particularly important in shorting stocks. A short investment thesis can’t depend on valuation alone.
A stock price can stay irrational longer than you can stay solvent.
If you shorted internet stocks in 1999 based on valuation alone, your fund would’ve closed door before you get to the crash.
In the short-term, the equities market is a voting machine. Stocks trade on momentum based on news flow, sell-side analyst recommendations, and earnings revisions.
An irrational valuation can stay irrational for quite some time. Your short thesis might be theoretically correct, but it also needs to make you money.
Identifying a negative catalyst is very important in shorting. A negative catalyst is a tangible event that would make the market realize that the company’s fundamentals are deteriorating and its valuation stretched.
For example, you find out that expectations for the upcoming quarterly release are too high. Then the earnings announcement could be the negative catalyst to send the stock downward.
Or perhaps through your research, you find that a business’ competing products are rapidly gaining share in the second half of this year when many existing contracts will be up for bidding.
A sales announcement by the competitor could be the negative catalyst to drive a company stock down.
For a full article on how to develop short investment thesis, read my article on shorting stocks here.
Section 5: Valuation
There are two ways to value a company: absolute valuation and relative valuation.
Absolute valuation is to measure a company’s worth based on its intrinsic shareholder return power. The return could be in the form of cash flows, dividends, or economic profit.
The most common form of absolute valuation is DCF: discounted cash flows. You would discount a company’s future cash flows to present value using a weighted average cost of capital.
Another form of absolute valuation is DDM: dividend discount model. Instead of discounting cash flows, you would discount dividends. This method is popular with dividend stocks.
The least well-known method of absolute valuation is EVA: economic value added profit. You would calculate a company’s economic profit. The short definition of a company’s economic profit is its revenues minus its cash costs.
Forecasting Business Drivers
All three methods of absolute valuation require forecasting the company’s financials.
The most important thing in forecasting a company’s financials is to think about a company’s business drivers.
Forecasting is not simply about growing the company’s revenues and expanding its the operating margin. Revenues have drivers behind them. Same with the operating margin.
Take an apparel retailer for example. Its revenue growth first and foremost depends on the country’s consumption growth and consumer confidence. Next, it depends on the comparable store sales of existing stores, and on the number of new stores opened.
Same with the operating margin. The retailer’s margin depends on its sales per square feet. Selling more items in a given amount of space equates to more efficiency. It also depends on the company’s marketing strategies, development costs, rental expenses, and general corporate expenses.
For each company you forecast, think about what drives its revenues and margins. Segment its revenues by product, region, or business line. Look at metrics that drive the industry growth, as well as the company’s market share.
If you have access to a sell-side equity model, it’s a great place to start. Review the sell-side model with a critical eye, and ask yourself where you agree and disagree.
For each key business driver, produce 2 scenarios at a minimum: an upside and a downside. This produces an upside price target and a downside price target.
For your pitch, present your model and explain your assumptions. This demonstrates that you can value businesses and forecast scenarios.
Show that the company is either undervalued for a value pitch, or is reasonably valued for a quality-at-reasonable-price pitch.
To get the company data for your forecast, use SEC’s Edgar Company Search. It’s free and comprehensive.
If you have access to Bloomberg, CapitalIQ, or FactSet, that’s even better. They make it easy to export historical financial data into Excel.
Relative valuation is drived by looking at industry average multiples of company peers.
Common industry multiples are Price / Earnings, Price / Book, Price / Sales, Price / Cash Flows, and Enterprise Value / EBITDA.
The idea is that given similar business fundamentals, companies within the same market should trade at similar multiples.
For example, Pepsi and Coca-Cola should trade at similar P/E. If Pepsi trades at a much higher P/E but the two companies are growing at the same rate, then Coke would be the more attractive stock of the two.
It’s important to find the right multiple to use. Why do certain industries use EV/EBITDA while others use P/E? Find out more in my article on hedge fund technical interviews.
Comparing a stock against peers is important. Another comparison is between the stock’s current P/E vs. its historical range. A bad company has usually traded at a discount historically, and it will stay that way unless its fundamentals improve.
The company’s growth rate affects its P/E as well. P/E multiples expand and contract along with the company’s growth rate.
The ratio of P/E over earnings growth is called the PEG ratio. The S&P 500 has historically averaged between 1 and 2 for most sectors.
When to Use Absolute vs. Relative Valuation
In the long-run, the equities market is a weighing machine. In the short-run, the market is a voting machine.
Use absolute valuation for investments with long-term time horizon. If your investment thesis is short-term focused (within 1 – 2 quarters), use relative valuation.
Section 6: Risks
When you do your research, think this question: “What factors might negatively impact my investment thesis?”
Every investment is a calculated risk. For every potential upside, there’s a possible downside. Talk about these risks one by one to show that you’ve considered them.
Think about the two to three key risks that would impact your investment thesis the most should they materialize.
Discuss likelihood of each risk and provide a mitigating factor or why you believe this is unlikely to happen.
Your risks are also your exit plans for the investment. When a risk materializes, you would reassess your investment thesis to decide whether you should exit this investment and move on.
Be truly critical and specific in thinking about your investment risks.
For example. the next global recession is not a specific risk. That would impact the entire market. Think about what are the potential issues with the company’s strategy or execution that might hinder the company’s quality, catalysts, or valuation.
If done well, this is an exercise in killing your investment thesis. For critical investors, this section is just as important as the overall investment thesis.
Investing is about risk management, if you haven’t identified the risks then your thesis is likely too optimistic.
Really demonstrate critical thought here. Don’t simply sketch over risks listed in sell-side reports.
Qualities of a Good Stock Pitch
What are your readers looking for when they read your stock pitch? After writing your pitch, you should leave your reader with four impressions:
- “This is a clear, concise pitch that was straight to the point.”
- “This person demonstrates deep understanding of the company and its key business drivers.”
- “This is a sound investment thesis supported by well-researched contrarian views.”
- “The valuation is backed by a model with reasonable assumptions.”
Have a friend proofread your pitch and give critical feedback.
If you leave your friend with these four impressions, then you have produced an excellent quality product.
Presenting the Stock Pitch
Expect different opinions from your readers. A stock is not a credible investment without a healthy debate. Aim to have a back and forth discussion on the stock. Anticipate questions.
The presentation of a pitch is very much a Q&A session. Think of all questions that could be asked and prepare your answers. Practice, practice, practice.
Be well-versed in the key drivers of the business, including the industry trends, competitors, as well as the revenue and margin drivers.
Most importantly, be humble. Its natural to get nervous when we present our work that took days and weeks of hard work to put together. Don’t get overly defensive, it can come across as being arrogant.
It’s also important to stay humble. If you don’t know something, say that you’ll follow up.
Ideally, prepare two to three pitches to get enough practice.
Practice delivering your pitch. Investment competitions are also perfect venues for a live audience practice. If your investment management club has a student fund, that’s a good place to practice your pitch as well.
Good luck, and leave your questions below!