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[Music] [Music] welcome to another tutorial video this time we're going to be discussing how to pitch a stock and cover our stock pitch guide as well as the company selection and research process this video corresponds to an M and I blog post called stock pitch guide you can go visit it down below on the screen just mergers and acquisitions comm / stock - pitch - guide and you can get some templates there the full guide and text we're going to expand on the article here and focus more on the idea generation part and in particular how you can come up with ideas for stock pitches and screen companies when it's the last minute and you don't have much time left so the plan for this tutorial will be to cover the basic stock pitch structure first which you're probably already familiar with but we'll go through it quickly and give you a few samples and templates then in part two we'll talk about idea generation how can you find ideas if it's the last minute and you only have two or three days or maybe five six or seven days to prepare for an interview at a hedge fund or asset management firm and then a part three we'll discuss the research and valuation process how you can do it efficiently how to find your angle and how to get the key inputs for your stock pitch including the complexity of the model and valuation analysis that you come up with and the ideal length and how to make it complex enough without going overboard and coming up with something that takes too much time to research and finish well let's go to part one first and talk about the basic stock pitch structure now this is something that we covered extensively on the site over the years so you can go through and look at the text version of this as well but you always want to start a stock pitch with a recommendation where you long or short the company and you say what it should be worth according to your analysis in our example on the site for Jazz pharmaceuticals we have a recommendation slide here we short the company we present our investment thesis and explain why the market is wrong about this evaluation and then give what we think it should be worth why we think its stock price will change what the risk factors are and how we can mitigate some of those risks then in the next section you give the company background you describe its products services market its approximate revenue ebody market cap at valuation multiples for Jazz pharmaceuticals we do just that we also include a price volume chart over the past year from before the stock pitch for good measure and we explain a little bit about what the long term projections and our base case scenario here look like then in part 3 you go through the investment thesis and you explain why the stock is mispriced and why the market hasn't factored this in and adjusted to the correct price so here we have three main reasons the threat of generics to one of the companies key product lines we think the company's ability to raise prices will be quite limited and we think that some of its new experimental products or drugs will have lower than expected potential in the next part you have catalysts key events in the next 6 to 12 months that will cause the market to realize its mistake and result in a pricing correction so for Jazz pharmaceuticals we have the FDA approval of some of those generic drugs we have the fact that when the company announces earnings everyone's going to realize that it is simply not raising prices on its key drugs as much as it did in the past and then we also have early sales results from some of these more experimental and earlier stage products then in part 5 you go through the valuation and paste in your DCF analysis comparable companies and whatever other analysis you have to show why the stock is undervalued or overvalued you can see our example here for jazz we have a football field valuation chart we have a summary of our assumptions for the DCF and we also have some sensitivity tables showing why we think the company is at best appropriately valued right now and actually significantly overvalued according to our views and then we go through the risk factors and mitigant and how we could reduce some of the risk or limit our losses if we're completely wrong and you can see it here we basically reverse the catalyst and say that maybe the generics will enter later than expected maybe some of the new drugs will perform better than expected and maybe some other products will gain positive clinical trial data and we can mitigate some of these risks with call options or stop-loss or stop limit orders and overall we say that we limit our potential losses here to about 15 to 20 percent and then at the end we just give us summary and show all of our recommendations here once again so that's a basic structure for a stock pitch again you can go the entire M&I article and read through all this in text format and get some screenshots of everything for a couple different companies here as well what I want to focus on doubt is the idea generation process what if you leave a few days you're not following the markets or specific companies closely and you need an idea for an upcoming interview as soon as possible the first step in this process is you need to figure out what strategy the firm you're going to interview with uses and then which industries it likes and does not like there are a couple ways you can do that you can of course to try to look on their website you can ask someone there about their strategies you can try to find their holdings and SEC filings so there are a couple different ways you can do this but you need to figure this out first because for example if you're going to interview with a value oriented long-only fund that likes industrial companies then you want to focus on companies in industrials or related sectors so maybe manufacturing or chemicals or even retail but something that is a bit more mature and is based a little bit more on hard assets you don't want to go in and pitch a short for an overpriced biotech startup if the fund only does long investments and focuses on undervalued companies and then you want to match the industry to something that lends itself to the hedge fund strategy or pick an industry that you know something about so let's keep going with this industrials example and we'll say industrial goods for the sector and then industrial equipment for the industry and I'll go on fin vis right here and for sector I'll say industrial goods and then for industry I will say a dish industrial equipment and components so we have those two for the screening criteria and so we get a set of 12 companies based on that now how do you screen and narrow down this list once you have the set of 12 companies first off you want to focus on mid-sized companies in the industry ideally ones that are in roughly the 1 to 10 billion dollar market cap range if you're working with us-based companies if you're doing this based on revenue maybe something with hundreds of millions of revenue to perhaps the low billions so you get mid-sized companies in the industry you don't want to pick giant conglomerate companies you also don't want to pick micro cap companies because they both have different problems and tend to be harder to use in stock pictures you also want to look for companies where there's been a clear divergence from the stock price trends overall over the past few months so maybe the entire market has gone up but one company has stayed the same or even decreased or it's the opposite and the entire market has gone down but one company has stayed the same or gone up so with this example for our industrial screen here first off we'd probably eliminate the top two companies at the top one is in the UK so it's not great if we're in the u.s. the other company is just too big and then we'd probably also eliminate some of these companies at the bottom because they're well below a billion dollars in terms of market cap which leaves us with roughly this set of companies five six or seven or so in the middle if we look at these companies share prices for the most part they have increased pretty substantially in the past three four five six months something in that time range however there are a few that stand out as not having increased by that much one clear example of that is Barnes group right here its stock price fell pretty dramatically the year before and then even this year it stayed basically the same even as everything else in the sector has gone up the other one that stands out is try mask corporation here it did increase the year prior to this but this year it's been roughly flat except for a quick increase right in the beginning in January and then if we want to expand this a little bit more we could also look at Standex corporation which has been relatively flat so far this year so if you look at all these and you look at something like this where maybe the company decreased a lot last year stayed flat this year even as the sector as a whole has gone up you get some ideas for companies that may not quite be following trends and might be a bit different from everything else in the industry so as I say we think that Barnes Group Standex group and tri mass here are probably the best bets for our initial screen now the next two steps steps four and five because I'm grouping them together are that you want to find companies with only a few key drivers and relatively pure-play businesses as well as clean and simple financial statements so you don't want a company with 20 different product lines where each one is say 5% of the revenue you want a company that has maybe two to three major segments and well-defined key drivers and you don't want a company that has say 50 items on its cashflow statement you want relatively short and simple financial statements so if we look at all these companies start with starting with Barnes Group its income statement here is fairly simple and straightforward if we go down to its balance sheet everything here is also pretty straightforward these are all the standard items you'd expect cash debt equity receivables inventory nothing too crazy here and it's cash flow statement we'd say is also pretty straightforward with exactly the items that you'd normally expect for a standard company if we go to try mass again it's balance sheet is pretty standard and straightforward seem for its income statement and moving down its cash flow statement looks a little bit more complicated on the surface but it's actually not that much more complex than Barnes groups and then finally if we look at stand X its balance sheet is similar maybe a little bit more complicated its income statement also looks fairly straightforward and then if we go down its cash flow statement is also straightforward although there are some more items here maybe it's a little bit more complex than the others however the real point here is that the financial statements are not that much different but Standex appears to have more segments than the others and that is going to make the research and valuation process it take more time to illustrate what I mean here let's just go up and do a search for one of the numbers in that screenshot so if you look at a summary of the company's operations they have a food service equipment segment and a grieving segment and engineering technology segment and an electronics and hydraulics segment two separate segments there actually and there are some that are bigger than others the food service equipment one is the dominant segment but it's not as if one segment has 90% of the company's revenue it's more like maybe close to a forty to fifty percent split for the food service equipment one so we have quite a few segments here by contrast if we look at something like the Barnes Group for example and let's just go down to where they have their split I'm searching for aerospace because I know already that's what one of the major segments is they basically have two segments Industrial and aerospace and if you go down a little bit and you look at financial performance by business segments they have industrial they have the sales and operating profit and operating margin and then if you go down they have aerospace and the sales and operating profit and operating margin and beyond that they don't really have much of anything so they just have two simple segments right here and if you go to try mass you'll see something similar so based on this quick screen we'd probably narrow this further to barn troop and try mess barns group is two main segments try mass has three main segments and two now the final step to pick a winner here and to decide is that you generally want a favored companies with clear catalysts in the next six to twelve months such as an announced acquisition or divestiture a major product launch a major expansion plan a strategic change something like that and if we go and look at try masses investor presentations and other sources we do see something that looks promising at first glance a recent acquisition announcement for this company plastic srl which is based in Italy however if we keep reading we see that its annual revenue is only about twelve million here and if we look at try masses revenue for the company as a whole it's close to nine hundred million so no matter how you slice it a ten or twelve million revenue company is just not going to contribute that much to something that is almost a hundred times the Sophos based on that we would say that try mass here is probably not the best one if you look through there are a couple other potential catalysts but overall we think that the Barnes Group is probably a better candidate for a couple of reasons if you look in their investor presentation for example one key slide here is that they give their major portfolio shifts over the last several years and they explain where they were before and then where they are now which implies that the company is changing by a good amount also if you look throughout this you'll see that there are some pretty clear references to their growth areas for example if we could do a search for automation right here they list it as one of their key growth drivers and as one of the key macro factors and that if we keep going they say that they've launched automation in 2018 establish fortune motion control in 2019 so these are clearly segments on the rise and if we keep going you'll see that here automation is only about 1% of revenue right now but it's growing very quickly by double digits which means that something relating to the company here is changing the other thing with Barnes group is that they do have high exposure to aerospace about 34% of its revenue comes from it just before I created this tutorial there was big news about Boeing and several fatal accidents fortunately company to ground their 737 max aircraft right after those announcements the Barnes groups share price fell by about 10 percent when the aircraft was grounded presumably because investors know this and they're worried about their exposure to Boeing but if you look later on in the presentation you'll see that yes they have some exposure they are making some parts relating to the 737 max but it's actually much less of a focus for the company then all the other Airbus and Boeing aircraft so we could make some type of argument that the company might have been unfairly penalized for its aerospace exposure here that's part two the idea selection process and how we came to the conclusion of using the Barnes group here let's now go through the research and valuation process you want to do four basic things here first is research the company in the industry by getting the annual and interim reports the latest investor presentation and recent press releases then you can build a simple DCF based valuation don't go overboard you want to project revenue and expenses beyond simple percentage growth rates and margins maybe go down to units sold average selling price or market share times market size and aim for around 100 to 300 rows in Excel if you've seen our DCF example for steel dynamics where we split up its sales into three main segments and a couple smaller ones something like this would be reasonable for a stoppage where we get up t around 150 or so rows here you don't want 5,000 rows you want something in that range we'd say a hundred to three hundred rows in Excel for your projections and DCF analysis and then for the public comps you could use fin vis or Google Finance to save time there take a look at our comparable company analysis tutorial for more on that one and then you also want to do some real life research so speak with people in real life for a few hours find some suppliers customers others on LinkedIn email them and offer your insights as an investor into their company in exchange for maybe 10 minutes of their time to answer a few questions that you might have had about the company or the industry as a whole so here we already have the reports and we actually already have the peer companies because when we did our fin visit screen this also gave us some of the peer companies that we could use so we already have that part done we just need to pull the financial information for them our first step would be to set up the DCF analysis and make the main splits between an aerospace and industrial on a revenue and operating income basis and then we go beyond that if possible maybe it would be unit Sol maybe would be market share maybe you'll be the backlog growth and the backlog delivered it can be a little bit tricky in this sector to go below revenue growth and operating margin by product line but with enough research and going through the filings and doing some online research for the market we might be able to do that and then for the real life research borange group mentions General Electric rolls-royce and United Technologies in its filings all those seem pretty important so we probably start there and then start looking for some possible contacts on LinkedIn and if we ran out of time maybe we can only speak with one or two people or contact one or two people but it's still a whole lot better than nothing the angle here would probably be something to do with the market over penalizing it because of its exposure to Boeing maybe under estimating its automation segment and maybe also under estimating its margin expansion potential if the automation segment really takes off presumably its margins will go up because automating tasks is cheaper than hiring humans to complete them or we could take the opposite view and maybe we should say and maybe we will say that it should follow by even more than it already has it just depends on the results of this process and what we find when we speak with people and do our market research the catalysts here could be backlog updates announcements relate to Boeing earnings announcements that have some of the automation segment results and maybe potentially acquisitions as well with the valuation we can't really say anything because this was intended to be a quick tutorial showing you what to do with limited time setting up a whole DCF here would take more time and I don't have it and I'm not going to show it here but you would do that and draw some conclusions ideally building in cases like the base case upside case and downside case to reflect your views what the market is thinking and then what you think will actually happen that's it for a tutorial to do a quick summary now the stock pitch structure is that you always want to start with your recommendation long or short what the company should actually be worth why it's miss price right now and why it's going to change then you give some company background information then you go into your investment thesis and explain why it's mispriced and why others have overlooked it then you go into the valuation and explain what you think it should be worth then you give the catalyst explain why its stock price will change over the next six to twelve months and then you give the risk factors and explain how to mitigate some of the risks for the idea to generation we recommend picking an industry that matches the strategy and industry focus of the firm you're interviewing with and also something that you ideally know a little bit about once you have that then you can go on a site like fin vis and screen for mid-sized companies in the industry focus on ones that only have a few key drivers and relatively clean to financial statements and relatively easy to understand businesses once you have that then look for companies that have clear catalysts in the next section twelve months and are changing in some way because those will be better and easier to discuss and then finally for the research and valuation process get the company's annual interim reports a few recent press releases start building a simple TCF and valuation analysis using the p r-- company data that you found before on sites like fin vis and use a very simple template and then go out and try to speak with people in real life if you can and incorporate some of those views into your analysis that's it for tutorial on stock pitches how to find companies with limited time screen for them and then pick the best one hopefully now you know a bit more about this process and what to do if you're in this position and you need to come up with a stock pitch very quickly