Fusion of Research Report and Financial Model

Water Cooler
#1

Hi,

I am an independent equity analyst based in Mumbai, India.

I have, during my stint as sell-side analyst, observed that most research reports sent out on the email, were quite often, ignored by the buy-side. The reason being, the buy-side is so swamped by sell-side reports on a daily basis, that they end up ignoring most, except a handful.

However I am also aware that the buy-side is usually interested in financial models. Therefore I am about to carry out an experiment - releasing a research report in a new presentation format: ‘Fusion of Research Report and Financial Model’. Apart from the model itself, such format would include separate worksheets within a spreadsheet, which would contain all text usually found in a research report (investment case, investment concerns, industry overview, peers, etc.).

I would like to believe the buy-side ‘may’ be more inclined to access and review such a format, simply because they are probably interested in the financial model part; the text of the report - the investment case and concerns, etc. - would be an add-on for them.

I would like to request sell-side analysts, to let me know, if you or any member of your team, or analysts in other firms, ever presented such a fusion - Research Report-cum-Financial Model. If not, what would be your feedback on such a format - would it likely be viewed positively by the buy-side? Would it help me get a better recall/recognition with the buy-side?

I do not claim to have made a ‘discovery’ etc., but would surely love the brownie points such a format could potentially lead to. As an independent analyst, I am struggling to build up my own small brand of small/mid cap research amongst institutions.

#2

I suspect the buy side will not fully trust models that they haven’t built themselves.

When I did policy work, one of the rules was that policymakers don’t trust a model if they aren’t able to fiddle around with the assumptions and see what happens themselves on their own time. My suspicion is that the buyside will feel that they have a special way of handling intangibles, or a special way of doing depreciation, or a special way of doing whatnot, and won’t know for sure if your model incorporates that right.

And the buy side generally has their own models already. Perhaps they’d compare your model with theirs, try to figure out what the differences are and why, then figure out if the differences represent something important.

I’m not saying it won’t make your stuff more popular; I’m just saying that if it may not be the slam dunk you hope it will be.

#3

As Bchad stated, the buy side has their own models where needed. Even where they aren’t necessarily planning to build a model, the buy side analysts are often disregarding sell side models in favor of multiples and value metrics. Analysts often skip to just a few sell side research pieces because they are trusting the track record of the sell side teams they choose to read and are often more interested in their view on evolving trends rather than what WACC rate they used.

#4

Buy side generally ignores sell side becasue sell side is generally wrong.

#5

your idea is not new…its already being done…difference is, the models are requested upon and not just sent out randomly…this is why the sales guys get paid, to get the connect…your reports won’t get read cause you got nobody calling anybody…

#6

I almost never look at sell side models unless I am thinking about being on the short side of an over hyped sell side long, in which case I will look for overly optimistic assumptions as a short catalyst (downward revision in EPS = downward revision in stock price). This is actually a pretty effective approach when applied selectively (in conjunction with other criteria). I don’t recall ever using a SS model for any other purpose.

The largest value add the sell side can provide is TIMELY and ACCURATE proprietary research. If you have conducted an extensive channel check that produced results that are in contrast with the consensus story on the stock, I would want to know that. If you recently interviewed a series of industry experts that suggest a certain product will succeed or fail, I would want to know that.

In contrast, I don’t really care about your understanding of the company’s plain vanilla press release they just distributed (that everyone else already read before you even typed up your note saying what everyone else already knows). I don’t want to read a note saying how you tweaked your margin assumption by 10 basis points and how that added a penny to your earnings.

I am not representative of the buy side as a whole (I spend very little of my time in Excel, which I think is unusual). But that said, I don’t know if your idea will get a lot of traction. I can just call my rep at any firm and get their model if I want it.

#7

Thanks for your comments, everyone. The skepticism from some, was very much expected. Nowhere in my post, did I claim I was the first one to think about this, but checked it out with the forum, since I am from a different part of the world.

@ bchadwick: The model part of my report (-cum-model) is fully customizable, since it is an unlocked spreadsheet. I’ve generated a better response to my financial models, than to my reports so far. In fact, I’ve had a few from the buy-side come back to me regularly with comments about my models, and inquiring with me about the current quarter’s earnings - even though they already have their regular brokers/sales persons servicing them.

@ bromion: My post was not about what methodologies an analyst should follow, but about the presentation format. I think analysts world over have similar ‘due diligence checklists’ and so do I.

#8

If you get that kind of feedback, then it sounds like it’s working for you.

#9

No, my point was that they do not have similar check lists. You’re talking about polishing a turd. I’m saying, don’t send me a turd at all.

#10

@ bchadwick: As I said, it’s not that 80% of the buy-side comes back to me with these queries. Even if 20% do, it still makes my day. I’ll have to probably run 10 such reports-cum-models through the buy-side before I can arrive at definitive conclusions.

@ bromion: “You’re talking about polishing a turd.” Dictionary meaning of turd : a lump of dung; piece of excrement…

Well you seem to have figured me out pretty quickly (without seeing or trying to understand my work). Maybe you forgot to use your checklist before “rushing” to your “analysis”.

Would have loved to have shared my checklist with you, mate, but sorry, I can’t, it’s “proprietary”.

#11

That’s fine. I stand by my statement that the best way for you to add value is to find proprietary information that is not currently factored into the stock price. I’m not talking about inside information.

It’s very clear to anyone who has worked on the Street for a while that everyone has more or less the same conversations with management, reads the same sell side reports, and follows the same consensus / guidance numbers. All of those assumptions get impacted into stock prices, and this is one reason that people think that the market is very efficient (as it is in some places). But you can still beat the market if you can consistently find under appreciated or misunderstood information about a company / product / industry. That kind of information is what the buy side wants. Models rehashing the same numbers that everyone else already has don’t add a lot of value.

So my point is that repackaging the same thing that everyone else is trying to sell (that most people on the buy side are not wild to buy) is not a great business strategy. If your model has something extra that people would want (besides format) then it might be a great product. But that wasn’t the way I read your initial post.

Anyway, I wish the best, good luck.

As an example of what I am talking about, I recommended a short in the first week of February – that stock is already down 25%, probably on its way much lower (at least 50% lower by my math). The reason it is down is simple: there was talk of a competitor entering the market and the Street dismissed that. The sell side in this particular case was obviously overly bullish because the company has a history of secondary offerings (which brings out some notoriously cheesy brokerage firms to pump the stock in an effort to woo management into giving them the next secondary – which is likely as the company has a history of burning cash). So the sell side poo-pooed the entry of this competitor (which is private and therefore hard to find info on). The stock is systematically mispriced because those controlling the information flow are either lying (management) or refusing to incorporate new information (analysts). Once that information becomes undeniable, the stock is going lower.

I networked with a couple of people in the industry and found out that the competitor is not only going to enter, but is going to run the tables when they do (based on favorable economics). It looks like the Street also caught onto that (I guess since there is no other news that would send the stock down), it just happened that I was first. I didn’t look at even one model to figure that out – I sketched out the math on the back of an envelope. And to the extent that the models are all wrong (which is about to come to light), I would have missed the opportunity if I had relied on those models (or worse, I might be long).

So the point is, I can guarantee you that being able to provide winning information like that is a lucrative business model. But cutting the same data that everyone else is looking at is a hard sell. The format is the least important part.