The Stock Pitch

The Stock Pitch is used in a variety of areas in finance, but it really boils down to one simple idea – you are giving an investment idea, and backing up why you are giving that idea.

The stock pitch can come in different forms. Some pitches are typed up in Word and published as PDF. Others will be given in person with a slide deck to support. Whatever the method, the stock pitch will contain certain standard information. This blog post is going to detail those pieces of information.

Stock Summary

The stock summary can usually be whittled down to a few lines, or a simple table. It includes basic information about the stock to give a general picture of where you are approaching your analysis from. Information that is usually included can be

  • Current share price
  • Your price target
  • % Upside
  • Market Cap
  • Enterprise Value
  • EV/EBITDA
  • P/E
  • 52 week high/low
  • All time high/low
  • Relevant trading ranges

It is then useful to briefly summarise your recommendation on the stock. This is simply whether you would long or short the stock, and what your target price for the stock is.

Company and Industry Background

This section gives some background on the company and the industry. It informs the recipients of your stock pitch about what the company actually does, where they make their money, and the competition in the industry.

It can also be useful to mention some general industry trends, major legal changes, or important information along those lines. You don’t have to make this very long – the stock pitch is simply a pitch to someone to have a look at your investment idea. You are not trying to get them to fully understand it at this point. Only include information that is vital to an understanding of the rest of your pitch. Don’t bury the important stuff underneath a mountain of details that aren’t really needed.

Investment Thesis

The investment thesis is where you actually present the meat of your investment idea. Usually, an investment idea will focus in one of more of three aspects:

  1. Business Quality
  2. Upcoming catalysts
  3. Valuation

This will hopefully be obvious to you. You have made an investment idea for some reason, and this is where you need to present that reason. Keep in mind, though, that this is the point where you really need to prove that your idea has legs. If you can’t do this, then your pitch will fall flat. Make sure you know exactly what is is that makes this a good stock, and what upside number you can extract out of the idea.

You are trying to convince somebody quickly that they will be able to make money using this.

The problem with presenting a stock pitch, is that you will mostly be disagreeing with what everybody else thinks. The whole basis of a stock pitch is that you think you have found a stock that is trading at a different level than you think it should be trading at. If everyone agreed with you, the stock would already be trading at that level.

Therefore, you need to address this in your pitch. You need to explain why the market is trading the stock at the level it is at, and why the market is wrong. Do you understand the business better than the market does? Are the catalysts upcoming being doubted by the market?

You need to really nail down here to find exactly where your views diverge from that of the market. You can do this by reading industry reports, news, or speaking to people who know that company.

By the end of this section, you should have presented your investment idea, and backed it up.

Catalysts

Catalysts are events that tell the market where they have been wrong. A good example of this would be the release of earnings by a company. If the company is growing at a higher rate than the market has expected, this will cause the stock price to move up. On the other side, if the growth is weaker than expected, the stock price may fall.

The important thing to remember about catalysts, is that without them, there is really no reason for a stock to move. You may have solid evidence that a company is undervalued, but unless the market finds out about it, the stock will never get to your target price. Therefore, it is important to take catalysts into account when developing investment ideas, and to present these catalysts in your pitch.

Some examples of catalysts may include earnings reports, results of clinical drug trials, and regulatory approval.

Valuation

I won’t write too much about valuation, as I have done several blog posts on different ways to value a stock. In a stock pitch, you do want to present a hard stock price as your target, so that you can present the numbers associated with your strategy, however some idea generation can come from thinking about the valuation.

One of the aspects that you can think about is forecasting business drivers. You can gain an idea on if forecasting a company’s financials will provide you with some numbers you can work with by thinking of these things. These are the core things that allow your company to make money. Things like seasonality, macro trends and the opening of new stores can drive a business. Determining if there is something you can work into a model to get the numbers you want can be helpful in deciding which company you want to model.

Relative valuations such as Comps can give you some direction as well. The nice thing about a comps model, if you know what you are doing, is that you can import a list of company financials and export relative valuations focusing on different companies in that group. This can help you find an undervalued company within an industry that has a catalyst coming up, and give you some direction on how your absolute valuation is going to go.

Risks

This is vitally important to include in your pitch. All investment ideas have inherent risks attached to them, and ignoring them may make you look naive or just simply inexperienced. These risks may dive directly into the company’s operations, or they may have something to do with the industry itself. General market movements are not good enough alone when determining what the risks of the investment are.

When you are writing about your risks, you need to be clear on how they would present, and what your plan is if they do present. Will the stock price itself tell you if you were wrong, or will you have to wait for news about a catalyst to determine that?

If you would like a longer guide to pitching investments, you can’t go wrong with Wiley’s series of finance textbooks. Below is the textbook on pitching investments which will be well worth your read.

Pitch the Perfect Investment: The Essential Guide to Winning on Wall Street (Wiley Finance)

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