February 26, 2020 by Alexander Goleszny
Preparing Your First Stock Pitch
My first stock pitch was rough. My comparable companies analysis was a paragraph “comparing” companies, the discounted cash flow was missing multiple components, and the first question I got asked was “You’re in first year right?” Whether this is the first time you have thought about stocks or you’re the person who has been to every Western Investment Club (WIC) meeting since September, putting together your first stock pitch is going to be challenging.
I started by searching for stock pitch guides, reading over the pitches posted to WIC’s website (which you should check out), and still felt overwhelmed. If you feel like you are in a similar boat, this guide is for you. It was written with the help of HBA’s and WIC’s executive team to help students make their first stock pitch. As a result, this guide focuses on the bigger picture and spends less time on technical concepts. Keep in mind that your stock pitch doesn’t necessarily have to follow the same order as this guide.
What goes into a stock pitch?
Before starting a stock pitch it’s a good idea to understand what you are going to be putting together and why you are doing it. Keep in mind that most competitions emphasize value investing. You want to show the judges you have found a high quality company at a reasonable price.
As you read through this guide I recommend opening one of WIC’s pitches as an example of what a full stock pitch might look like. You can find examples at this link under “buy/sell presentations”: https://www.westerninvestmentclub.ca/resources
The company overview is how you start your pitch and should answer the question: “What does this company do?” You should cover core operations which often includes explaining where the company operates, what product/service it offers, and key financial metrics like revenue, costs, and profit.
At the end of a company overview someone who has never heard of your company before should be able to understand–at a high level–what it does.
Internal analysis is your chance to start diving into the parts of the business that make it strong. Maybe it sells a unique product, has a monopoly in a niche sector, or a strong supply chain that keeps costs low. You could also focus on recent business developments or explain how the company has evolved over time.
Through your research, you want to show a strong understanding of this business, and more importantly, that there are good reasons it could be worth buying. Keep in mind, before getting to valuation, this part of your pitch should focus on explaining why this is a good company.
A lot of the internal analysis is started for you in a companies annual fillings where they discuss the most important parts of their business. One of the best ways to develop a strong understanding of your business is by reading through their 10-K. To find a 10-K, you can search “Company name, investor relations” or go to a website called BamSEC where most US companies fillings can be found.
By now, the judges know what your company does and what makes its business model strong. The next question you need to address is how they fit into the broader competitive landscape. Two things that are almost always relevant are competitors and the global business environment. A few questions you could ask yourself when creating this part of the pitch include:
- Who are their competitors and what do they do?
- Why should I buy this company and not their competitors?
- What is this businesses market shares?
- What trends will affect my company’s business?
- Some trends to consider include: seasonality, if the market is growing, how social trends (i.e health conscious eating) affect demand for their product, or risk due to ongoing trade disputes?
There are lots of ways to look at external analysis and it is up to you to think about what is relevant to your business. For example, if you are pitching a car maker the judges might expect you to talk about the shift towards electric vehicles and the effect of tightening emissions regulations. If you are pitching a retail business, you might want to look at mall traffic and consumer preferences.
Your investment theses should build on your understanding of the company to explain why it is undervalued. While the theses should always be specific to your company, some common reasons you might think a stock is undervalued are strong growth opportunities (that the market has missed) or an overreaction to recent news. Generally, pitches have 2-3 theses backed up by both qualitative understanding and quantitative research. One thing to keep in mind is that each thesis should move beyond explaining why this is a good business, and focus instead on why it is a good investment. There is no one way to go about structuring a thesis, and your theses are also one of the most important parts of your pitch, so you should spend a good portion of your time developing them.
Value investing is not just about finding good companies, but buying those companies at a reasonable price. Valuation can be used to show that the company is trading at a low price relative to its quality and is often split into intrinsic and extrinsic valuation.
Intrinsic valuation is concerned with valuing the company based on its own ability to be profitable. You typically do this with a Discounted Cash Flow (DCF) model. If this company can generate strong returns for investors simply because it is very profitable, that could be a good investment. You can read more about DCF’s here: https://macabacus.com/valuation/dcf/overview
Extrinsic valuation is concerned with showing this company is cheaper than its competitors. It is typically done with Comparable Companies Analysis (CCA). Value investors believe in the Law of One Price, meaning that similar companies of similar quality will eventually trade at the same price – there is no reason to pay any more for one than the other. If you can show that your company has a better business model and is cheaper than its competitors, that would make a good investment.
Risks and Mitigations
Every investment has risks. You should identify the key risks to this companies performance and then explain what the company is doing to mitigate that risk (not eliminate it completely, or it wouldn’t be a risk). Judges understand that every business has risks and would rather see someone who has thoroughly considered them than a team that ignores them.
Companies have sections in their reports dedicated to identifying the risks to their business and that is always a good place to start finding risks. You should also consider risks to your theses. For example, if you think the stock could appreciate because of strong sales associated with a captive customer base, you could explore the risks related to these customers leaving.
There is one question left to answer, and in my experience, it is one of the most challenging parts of putting together a good pitch. At the end of the day, finding good catalysts will require you to answer the question:
“What is the market missing?”
Catalysts are things that will send the stock moving up and “confirm your thesis”. They are often broken up into short, medium, and long term catalysts.
Keep in mind that every professional manager has read the same financial statements as you, conducted similar analysis, and built similar models. Even if you believe that the company will expand, that expansion may already be factored into the stock price. When thinking about catalysts, you should also be able to show that they aren’t already reflected in the current price and understand why the market hasn’t come to the same conclusion as you. Catalysts should answer the question: “What events would lead the rest of the market to agree with my thesis?”
Slides, Slides, and More Slides
When I made my first pitch, I completely underestimated how long it takes to make a solid slide deck. There is no one way to go about it, so this guide will cover some principles I recommend thinking about.
- Make a master slide deck (this will save you a lot of time)
- Figure out what your pitch will look like before putting your thoughts into slide form
- Ensure each slide is consistent (font and size are the same, title is in the same location, the deck has a “theme” and looks well planned)
- Plan to spend at least a few hours making your slides
Practice Makes Perfect
During my first pitch our team had our first practice the morning of the presentation, realized our pitch was 10 minutes too long, panicked, and didn’t do so well.
You should plan to spend at least a few days practicing and refining your pitch. Almost every team I have met starts off with presentations much longer than the (often) 10 minute limit you have. It can be challenging to cover a few days worth of research in just 10 minutes!
As you practice it can also be helpful to get others feedback. Did your company overview make sense? Did the external analysis cover the trends others think are relevant? Was your thesis convincing? Were the catalysts believable? Having a fresh set of eyes review your pitch is never a bad idea.
Once you and your partner(s) are comfortable with the content, have the timing figured out, and finished polishing your slide deck, you are ready for competition day!
Stock pitches can be intimidating, you’re going to see upper years who seem to have their entire careers figured out, and “finance hardos” who you have seen answer questions at every club meeting. Knowing who both the judges and the competition are can be a nerve wracking experience – it’s a feeling I have at every stock pitch.
Just keep in mind that you put a lot of effort into your research, learned a lot during the process, and that everyone else is only there to learn. Results can be incredibly unpredictable. I have seen pitches win at one competition, then get refined at reused at the next only to go completely unrecognized. Every judge brings in their own personal philosophy and whether you place or not says nothing about your ability to become a great investor.