Stock pitch is used in daily jobs of Asset Management, Hedge Fund, Equity Sales, Equity Research or during networking with bankers. When it comes to recruitment in these firms, it is utilized in the interview round to test candidates’ ability to give the most well-articulated evidence for their idea. This article will provide practical tips in developing a perfect 15-minute stock pitch for interview round.
Stock Pitch Template and Example
“Pitch me a stock” is a must-have question for all Buy-side job interviews. At least 2-3 stock pitches should be prepared before Hedge Fund interviews while at Private Equity’s investment pitches, interviewees are assigned modelling test and case studies with pre-selected companies. Stock pitch in interviews is different from real-life ones in a way that recruiters evaluate how well-reasoning evidence is in supporting an investment idea, not to assess if it is right or wrong. Pitching a stock in an interview is an initial step to become a professional investor.
Most stock pitches are open-ended in which recruiters may give their candidates weeks to choose a company and do research at home while some other firms give 4-5 hours for an assigned stock (very time-constraint).
Whether it is long-time or time-constraint research, there is a common framework in pitching a stock:
- Investment Idea Summary
- Company Overview
- Investment Thesis
- How to mitigate risks
*Note: These elements are flexibly arranged in a presentation depending on what “story” candidates tell recruiters/investors. Depending on the purpose of presenter as well as type of stock, there is also no fixed type of data to prove a stock gaining momentum. The following examples demonstrate different ways of giving evidence for a stock.
1.1 Investment Idea Summary
A stock pitch starts with a summary of stock’s upward/downward trend based on its key data with target price. This part should be straightforward and actionable. Interviewees should only use neutral recommendations in case they are not sure about the business growth.
1.2 Summary of Company Overview
When it comes to company background, a presentation should include a brief industry outlook to highlight the position of the company in the market as well as its differences among other competitors.
Business model of a company is another aspect showing the company’s product, revenue stream, customer segmentation, etc. Company data should be provided to bring an overview about the business performance such as its market cap, revenue, enterprise value, debt, any significant shareholders if important, etc.
Besides, there are some company’s notable events such as past M&A transactions, new product launches or changes in board of directors, etc. Applicants should only mention the most significant event that affects company’s growth.
Here is an example of Starbucks’s company overview.
Source: Hedge Fund Management Company, Pershing Square Capital Management
Company overview of Starbucks starts with a brief outlook of coffee industry
Then comes the business overview…
1.3 Investment Thesis
Investment thesis is a definitive statement answering a question: Why this stock should be invested. There are 3 elements deciding a stock worth/unworth investing:
- Business quality: Stable growth in its revenue
- Catalysts: Special events generating more return/less return
- Valuation: Discounts for investors as the market undervalues the stock
Stock pitch for an interview should include 3-5 key drivers that significantly affect the business.
The reasons for investment ideas have to be atypical of other analysts/portfolio managers. A successful investment thesis specifically and stock pitch generally will make portfolio managers consider buying the stock candidates present. Our Investment thesis writing guide will provide practical tips in developing a good investment thesis.
Gilead Sciences’s Investment Thesis (A Biotechnology company)
Source: Duke Investment Club
Sony investment thesis
Starbucks investment thesis
Catalysts are events affecting the price of a stock: undervalued or overvalued. “Hard” catalysts are specific and distinct events that directly affect a company such as quarterly earnings announcements, product launch, acquisition and insider transactions. In the meanwhile, “soft” catalysts are potential events that might cause a stock to move up or down such as expected M&A activity, monetary policy, global/political events or change in market share. Catalyst is necessarily used for short recommendations which mostly rely on timing.
Due to diverse business holdings and difficulty in forecasting so many business segments, Sony’s stock is undervalued.
When it comes to Samsung chronic undervaluation, there are four value-sapping factors causing a significant discount in its stock.
Source: Investment company, Elliott Management Corporation
There are basically two types of methods in valuing a company: relative valuation and intrinsic valuation approach. They are commonly used in Private Equity, Equity Research, Merger and Acquisition (M&A) in order to gauge a company’s current market value and then assess whether it’s undervalued or overvalued. The relative valuation approach includes company comparables and precedent transactions. Discounted cash flows (DCF) is the most frequently used valuation model in the intrinsic valuation approach.
- Company comparables: This method compares a company with other public companies with similar size and the same industry. It looks at the ratio of EV/Sales, EV/EBITDA, EV/EBIT and P/E. It is important to find the right comparable companies with the same industry, size, growth rate, margin and revenue. Furthermore, the metrics will vary depending on the stage of a company: EBITDA/EPS is used for mature companies while gross profit/revenue are utilized in value early-stage companies.
Bloomberg or Capital IQ are sources of company information. Company comparables analysis is based on the assumption of similar multiples of companies in the same industry. No matter how easy it is to calculate with available data, there are still some drawbacks of company comparables. The valuation could be affected by temporary market conditions or non-fundamental factors. Besides, it is quite difficult to find comparable companies for diverse factors.
- Precedent transactions: Valuation of a company is compared to other companies that already have M&A transactions. This approach uses the same multiples as company comparables with typical metrics which are EV/Sales, EV/EBITDA, E/EPS. However, precedent transactions are based on price paid by purchasers for a business while company comparables are based on traded market value. This method is used to value a private company that does not have public trading comparables and evaluate market demand for acquiring a company. However, this approach is rarely perfectly comparable and the past transactions can not totally reflect the total market conditions.
- Discounted cash flow: This valuation method estimates the value of a company based on its future cash flow. DCF analysis helps calculate the present value of expected cash flows using a discount rate. Compared with the two methods above, investors prefer DCF since this method can project how much money the company will generate in future. If the discounted value of the future cash flows are equal or greater than the initial investments, investors will consider the opportunities. Vice versa, alternative models will be applied. And depending on the purpose of investing, investors will deliver their own decisions on whether to invest or not. You can go through Walk me through DCF to understand how it is employed to value a company.
Applicants should focus on DCF when it comes to company valuation. There are other types of valuation such as multiples to support the stock pitch.
Besides, it is vital to show an upside/down side view. To illustrate, the current share price is $100. Upside price target: $140 for 40% return. Downside price target: $83 for 17% loss. The ratio of upside/downside: 40%/17% or $40/$17 = 2.35x which is in acceptable range in most funds (2.25 – 2.5).
1.6 How to Mitigate Risks?
Proposing potential risks as well as ways of hedging them play an important role in making a stock pitch critical and grounded. Recruiters appreciate it when interviewees can show their opinions about opposing bear or bull thesis along with practical solutions.
A common mistake among interviewees is mentioning too general risks such as global recession or the replacement of technology for human roles. The best approach is to reverse the catalysts that significantly change the performance of that stock such as the failure in achieving the quarter earning goal or an M&A transaction.
It is challenging for not only interviewees but also bankers to propose potential risks for their clients. There are some sources candidates can get input such as Buy-side reports, press releases (Medtronic S&P, Medtronic Fitch), credit rating agency reports, etc.
The recent slowdown in U.S same-store sales was the driving force for the reduction in Starbucks’ long-term financial growth, thus it is essential to propose some practical solutions for this issue.
Here are some potential obstacles for Gilead Sciences and ways to mitigate them.
Summarize the investment idea with emphasis on the implied upside.
2. How to do a Stock Pitch?
Whether it is at-home research stock pitch or time-constraint stock pitch with 3-4 hours of researching a given company, there are some basic steps that should not be ignored.
2.1 Understand Fund Strategy
As mentioned before, candidates are likely to ace an interview if investors/interviewers take the investment idea into account. What makes them consider buying a stock is its suitability for their investment strategy. Generally, the first rule of thumb for applicants is to understand the fund’s AUM, style, holding period, strategy and type of holdings. For example, it is recommended to pitch a credit trade to a fixed-income fund or credit fund.
In the meanwhile, interviewees easily fail an interview if they pitch a gold-mining company to technology-focused funds or pitch a common stock that other people know better. Some common mistakes of novices are pitching a short stock to long-only funds, pitching a small cap company to large-cap funds or including technical analysis for fundamental-research funds.
There are some sources for company’s information:
Fund’s website or other blogs that follow Hedge Fund’s 13Fs closely such as InsiderMonkey, ValueWalk are useful sources for finding company’s information.
SEC filings (13-F filing) on SEC website is for any funds having more than $100 million assets at the end of the previous year. Besides, insights could be from networking such as college alumni, friends, LinkedIn, etc. Our networking guide provides practical tips for talking with bankers in the most effective way.
Finally, candidates cannot miss the headlines or target funds’ latest activities on Bloomberg brief, Wall Street Journal or Financial Times.
2.2 Choose an Idea with Careful Research
When it comes to company research, there are two approaches:
|looks at revenue, valuation and industry trends. This approach is probably used by the majority of hedge funds with medium & long term investment.|
looks at trends, support resistance, fibonacci retracements and volume analysis.
It is recommended to choose a less covered company that portfolio managers might actually consider. This is also an opportunity to show thought-out ideas that other analysts might not think about. Portfolio Managers in Hedge Fund or other investment funds will not consider investing in a common stock that everyone knows such as Apple, Microsoft, Tesla, etc. They value outstanding interviewees who could add more values in a presentation.
There are some basic drivers to consider a company such as sales volume, sales growth, market size & growth, margins, new product lines, new product cycle, price increases, cost increases and mispriced balance sheet items. It is better to choose a mid-cap company with 3-5 key drivers. Investment thesis will be long and frustrating for the evaluator if too many drivers are proposed.
Final step is to consolidate financial statements (usually messy and long) and valuation. In a stock pitch for an interview, a successful stock pitch boils down to three factors: catalysts, risks and valuation.
2.3 Present a Stock Pitch
In the interview, the stock pitch could last for 10-15 minutes (10-15 slides) in which evaluators could jump in any part of a presentation for questions. Thus, be mentally strong and pay high attention on what is presented, even a number or primary research. On top of that, it is necessary to prepare a list of answers for many questions that recruiters may ask. During the presentation, ensure a perfect slide with solid references and a copy of a 3 statement financial model with analysis. Plus, candidates should be humble and honest if they are making a mistake.
3. What Makes a Good Stock Pitch in an Interview?
– Story lines in the beginning of each slide make investment ideas coherent with grounded evidence.
– Showing a difference with thought out ideas especially in valuation, catalysts, risks and how to mitigate them.
– Be honest, willing to accept feedback and open to being challenged by interviewers through many questions and cases.
– Make a good impression through excellent communication skills such as speaking clearly with appropriate body language.