equity research handbook (1)

8/12/2019 Equity Research HANDBOOK (1)

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Analyst Handbook


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Clients will pay us if we make them money or if wemake them smart.

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The Ten Commandments

Develop proprietary opinions based on primary research. Regularly

check with competitors, customers, and suppliers of each of yourcompanies. Develop unique approaches to financial analysis. Performproprietary surveys. Avoid at all costs simply repeating guidance ormanagement opinions unless you disagree with them.

Be proactive. trive to be the first to market with any new idea or piece of information!!if we aren"t, our competitors will. All information becomes acommodity very quickly . #ach analyst should be in front of theinstitutional sales force no fewer than two to three times per week.

Be provocative. Playing it safe turns into a loser"s game over time. $t

dulls our senses and results in lackluster analysis with no impact on ourclients.

%ollow and publish regularly on at least &'!&( institutional!quality stockswith market caps generally in the )*++ million ! )* billion range and withan average daily volume greater than '++,+++ shares. rite all researchwith an eye to the institutional market!!it can always be encapsulated forthe retail client.

-aunch coverage on at least one new stock per quarter, pruningunproductive names from the list as required.

aintain an above!average stock picking performance. According to a/elson"s survey, the average all treet analyst is right about ((0 of thetime1 our goal should be to be right 2(0!3+0 of the time.

Develop a following with our top accounts. #ach focus account should becontacted at least once per month. 4his list will be developed with thesales force and will be monitored regularly.

5ooperate with corporate finance. #very idea generated by corporatefinance deserves our attention, but be sure to operate within theregulations that require a gatekeeper to be present for mostconversations.

#6pand our relationship with retail. 7nly a small amount of retail8s equitybusiness is in our names, and it can be much higher with a modestamount of additional effort. 4reat the brokers that have substantialpositions in your stocks as you would an institutional client9add them toyour contact list. 4alk to April -angel regularly about your stocks, maintain

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an active %ocus -ist, and speak to the entire retail department periodicallyabout your group and your best ideas. Return all calls from brokers within': hours. 4here should be regular visits to the branches, with a goal of ( !&+ visits per year. 4ake company management to the ma;or branches andarrange field trips to local companies.


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Bottoms!up research with strong financial analysis $deas Regular follow up #lectronic access to research!!?(0 name %irst 5all as primary

electronic source 4elephone access to analysts is better than visits

Commission roductivity

7ur productivity measured as nickel business per analyst is below our regional peersas shown in the following table

$nstitutional 5ommissions Per Analyst ) millionsC%irst Albany &.(

anney &.: Advest +.2

tifel +.2BBE4 +.(%erris Baker atts +.(

Ryan Beck +.:

4his is not difficult to fi6!!more stocks, larger cap not large!capC, more ideas, and moreimpact!oriented calls, and the regular commissions will take care of themselves.

!arket Cap Targets

e could be ultra competitive at the lower end of the market cap range, but there aresimply not enough funds under management nor enough trading volume in this area tomake it a profitable business longer term. Data as of %ebruary '++: shows that onlyabout &0 of institutionally invested funds measured by market cap and :0 by tradingvolume were in nano! and micro!cap stocks.

ercent "f Total Stocks !kt Cap #olume $nst !kt Cap $nst #olumeega &+ Bil PlusC 2.+0 3'.30 *(.>0 2?.>0 :+.&0

Big * !&+ BilC ?.&0 &:.:0 '+.30 &3.'0 '(.(0id & ! * BilC &*.(0 3.20 &(.>0 >.&0 &>.&0mall *++ il ! & BilC '+.:0 *.>0 &&.20 :.+0 &&.+0icro &++ ! *++ ilC &3.20 &.&0 2.:0 +.>0 *.'0

/ano -ess 4han &++ ilC *:.:0 +.*0 >.(0 +.&0 &.&0

4otal &++.+0 &++.+0 &++.+0 &++.+0 &++.+0

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At the other end of the spectrum, we could become competitive on a research basis inthe mega! and large!cap arenas, but we do not have the capital to make ma;or marketsor to do block trades in this high!end segment. /et net, we are only able to leverageour research efforts in institutional commissions and other areas of the business in thesmall!and mid!cap segments of the market. e do need, however, to follow a handfulof mega! and large!cap bellwethers to establish our industry e6pertise and to facilitateour vote penetration at large voting accounts.

7ur current mi6 is very reasonable, but somewhat meaningless since we have so fewstocks under coverage. At a &(+!stock coverage level, the targeted mi6 would give usabout &++ mid!, large!, and mega!cap stocks that we need to effectively collect voteson a broad base, while still being heavily concentrated in the small and mid!cap areasthat will allow us to differentiate our coverage.

Ryan Beck Research 5overage 5urrent i6 ' ! year 4arget i6

ega '0 (0-arge *' &(

id '( :+mall *& '(icro > &+

/ano & (

!orning !eeting

This is our most crucial interaction with the sales force and trading--without a high-impact morning meeting, we cannot leverage our research, and ultimately will fail as anorganization.

#very analyst should strive to be in front of the sales force at least two to three timesper week. At first blush, this may seem like a difficult goal, but let"s look at a typicale6ample

4he basics 4here are '' trading days in the average month and let"s assume that agiven analyst is following &* stocks the average for all of all treetC.

Ratings -et"s assume that of the &* stocks, one is on the %ocus -ist, seven areBuys, four are Folds, and one is rated ell.

%requency At a minimum, all %ocus -ist, Buys, and ells should have a call two timesper month. Folds can be only once a month.

5ontent /ot every call has to be action oriented, although the more action thebetter. 4he sales force and the clientsC need to be constantly updated as

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events unfold to reinforce our point of view, and to give early warning of achange in our point of view.

o, where does this leave us as to the number of callsG

%ocus -ist & 6 ' H 'Buys 3 6 ' H &:Folds : 6 & H :

ells & 6 ' H '

4otal calls '', or 1 per day for every day of the month .

Why two calls per month on uy!"ell rated stocks# %irst of all, we aren"t doing our ;obif we don"t speak with every company we follow at least once a month, preferably mid!month so that the company has had time to look at its results for the previous monthand may be ready to change its guidance. Assuming you make this minimum levelcontact, then you will have something to say to the sales force if it is nothing more thanI$ spoke with management today, and everything seems to be on track.J $t"s really thatsimple, and there"s no e6cuse for not taking the high road on this issue.

Kou also get at least two freebie calls on each company near earnings release time!!first an earnings preview, then a first!impressions call if the company releases resultsfirst, followed by a conference call later in the day, and then the analysis of the quarter.

As to the requirement for two or more calls on BuyL ell rated stocks, let"s presume thatyou want the sales force to know these stories better than your Fold rated stocks andthat you want them to make regular contact with the clients. 4he only way toaccomplish this is to give them fresh meat.

ake your mid!month checks with the company and write it up for %irst5all.

#valuate every news item on the industry andLor the company to see howit fits with your investment thesis. $f it confirms your thoughts, write it up.$f it doesn"t, don"t ignore it since your competitors won"t. $f it appears tobe an anomaly, address it as such and take the sales force through yourthought process. $f it might be the beginning of the unraveling of yourposition, give the sales force an early!warning call and prepare them withthe signs you will be looking for, either to stay the course or to make a

change. 4ake the time to analy@e ideas that you get from talking with clients. 4hey

may raise a concern that you had overlooked, think a competitor has afresher view of the company, or suggest another way to look at acompany. Don"t ;ust do the work for one client!!flesh it out and use it toincrease your impact with the sales force and all our clients.

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Additionally, let"s not forget that our ;ob isn"t done ;ust because welaunched coverage on a new stock. 4he first few months after launch arethe easiest time to get the sales force"s attention since the idea still hasthe taste of newness, and they will generally be more receptive to newdata and better ways to deliver the story.

How %ou Say $t $s "ftentimes !ore $mportant Than &hat %ou Say

4he structure of the call is crucial to get the sales force"s attention and to make it morelikely that they will deliver your message to the clients.

%irst of all, base your presentation on your %irst 5all note. $f you have structured itproperly, you have already laid out the call for the sales force. Kour comments shouldsimply add color and make sure that the sales force understands the importance of theinformation. $nder no circumstances should you simply read the note to the salesforce.

4he salesmen and traders have to take what might be a two to three minutepresentation from research and condense it into a *+!2+ second portfolio manager ortrader call. $n order to help in this process, $ would recommend that your presentation

and to some e6tent, your write upC stay close to the following general format

Always start your call as follows

&C 4he company $8m going to discuss is$ts symbol is$t closed yesterday at

'C e are changing our rating from MMMMMM to MMMMMM and our '+MM and '+MMestimates from MMMMMM to MMMMMMM, respectively.

7R

e are changing our rating from MMMMMM to MMMMMM and reiterating our '+MM and'+MM estimates of MMMMMMM, respectively.

7R

e are changing our '+MM and '+MMestimates from MMMMMM to MMMMMM,

respectively, and reiterating our rating of MMMMMM. 7R

4his is an information call that lends further support to our investment thesiswhich is MMMMMMMMMMMMMM.

*C 7ur price target for the stock is MMMMMM.

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:C 4he principal reasons for these changes are &C 'C

*C :C

(C

NEVER, NEVER, NEVER have more than five points in any call, and try to keepit to three.

(C 4his isLis not proprietary information. $t was obtained from a general meeting,private conversation, proprietary analysis, etc.

2C As a result of these changes, $ now appear to be in line with consensus...

7R

As a result of these changes $ now appear to be at odds with the consensus of MMMMMM because......

3C 4he stock8s recent trading has been characteri@ed by if there is any significantchange in its trading patternC

By providing a handout and a discussion format that is user!friendly, you will bepositioning yourself for more broad!based and effective sales and trading followthrough on your morning meeting comments, as well as greater visibility with yourclients.

First Call

%irst 5all is by far the best way to leverage our research efforts and takes priority overall other production and distribution efforts.

%irst 5all has the widest distribution, appearing on well over *+,+++individual desktops worldwide. $ts data base contains almost &+ milliondocuments, so we have to be quick, punchy, and insightful in order tobattle for mind share.

5lients view %irst 5all as their primary and most important source ofinformation. A recent survey by =reenwich Associates found thatelectronic distribution was the most important means of obtaining

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information, with about ?(0 naming %irst 5all as their preferred source for obtaining research.

According to a recent %irst 5all survey, the five most important items intheir data base are displayed in the following list. ince we control the

content and timeliness of four of the five items, there is no acceptablee6cuse for not being at the top of our game in giving customers what theywant.

#arnings estimates Analyst recommendations Revenue estimates 5ompany pre!announcements =rowth rates

Kou can get your message out even if an individual salesperson decidesto not make your call. /ot all of the sales force will embrace all yourideas due to different client requirements for market cap, sector focus,investment goals, and so forth. %irst 5all is the great equali@er.

ith such a large dependency on %irst 5all by virtually every ma;or andregional brokerage firm, it is crucial to format research notes for ma6imumimpact. %irst 5all surveys tell us that the average client spends only &+!&( seconds scanning the note, so the following approach is critical.

4he title should always begin with the stock symbol, followed by acatchy headline.

4here should be a minimum amount of numbers.

4here should be three to five one!line bullets that tell the entire storyand that can be read in ten seconds.

4he bullets are not enough, however, and they must be followed bysome real, insightful research!!not ;ust reporting!!written in a clear,concise form.

%irst 5all notes must be posted by ? ++ a.m. to have any impact. 4his isparticularly important for mid! and large!cap stocks since the surveys suggestthat clients only read the first four to five notes that come across theirsystems on a stock on any one day. 7bviously, breaking news during the daythat requires a note can"t meet this requirement, and these notes should beposted as soon as possible.

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7ur goal is to be in the top ten brokers every quarter as to timeliness andquantity of %5 notes per stock. 4his generally means 3(0 of all %5 notespublished before > *+ and :!( %5 notes per stock per quarter.

'asic (eports)!a*or +pdatesThere have been several surveys over the last few years that clearly suggest that we,as research analysts, must do everything in our power to make our written product aseasy to use as possible, or it will be relegated to the scrap heap. The key points fromthese various are%

A portfolio manager will spend only '+!*+ seconds on the first page of aresearch report to decide whether or not to read it.

$f a P decides to read a report, he will on average read only the first

three pages. Research reports should generally fall into three categories

&!* pages!!distribute only on %irst 5all :!2 pages!!always include quarterly earnings models &+N pages!!targeted at analysts and crucial for large voting accounts

Based on this input, we will put in place the following array of products

The "treet produces about &'( pages of company research per analyst per year. Thisdoes not include industry updates, weekly!monthly overviews, and so forth. )ur focuson deliverables should be to improve our timeliness and quantity of reports whileimproving the content.

ithin the conte6t of writing research reports that address both portfolio managers andanalysts, the following guidelines should be observed

/ew coverage should be launched with a report that is detailed enough totell the story including growth prospects, market segmentation,competitive position, risk factors, valuation analysis, and a financialforecast. $t should contain at a minimum a detailed quarterly forecast forthe ne6t two years. /ew coverage can be launched with either a shortreport that covers only the highlights of the story or a long report thataddresses all the issues e6pected in a complete company report. 4heapproach chosen by the analyst should take into account several factors,including the comple6ity of the story, the ability to turn around a completereport quickly, the action in the stock, pending news, and so forth. $ngeneral, coverage should not be launched until a first draft of thecomplete report is in the editorial process.

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-aunching coverage on a new industry or a new sector within a currentindustry should be done with a Ofranchise buildingO report that provides in!depth industry analysis as well as our normal detailed company analysis,hopefully on two or more companies. 4his both establishes our credibility

with investors, and provides the building blocks for the franchise. Regular updates should be published as events unfold, but no less

frequently than once per quarter when financial results are released.tocks that are being actively recommended or that are seeing high

trading activity need more frequent written updates so that the sales forcehas fresh material with which to work. All updates should include at aminimum a detailed quarterly financial forecast.

$n general, comments from the morning meeting must be documented,unless they are simply responding to news in the paper, comments from

other firms, response to questions, daily trading recommendations, or areaction to changes in stock price.

All earnings andLor ratings changes must be detailed in a report thatincludes the reasons for the changes and a detailed quarterly forecast.

e will need to produce a monthly report that highlights our coverage.4his is used primarily as a marketing tool by the institutional sales forceand has minimal investment impact.

Research Report Structure

*f one were to ask five different analysts and five different salespersons about the rightway to write a research report, there would surely be ten different answers. The onlyway to get our arms around this question is to ask our clients--not a dozen at random,but hundreds of clients. +rudential "ecurities did e actly that a few years ago, so wedon t have to reinvent the wheel. They hired an outside consultant who interviewedover '( clients /weighted about &! portfolio managers, 1! buy-side analysts0. Theoutcome of the survey is summarized below.

&ho,s The Audience-

4here are many right ways to write a research report, although two questions should beanswered by the analyst before it is published

ill $ get a portfolio manager8s attention with the first pageG

Fave $ supplied adequate added value for an analystG

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$f the answer is yes to both questions, the internal structure should be fle6ible andadapted to the specific situation!!a stable growth company will certainly have a differentfocus than a company recovering from a weak period. /ot all reports will cover thesame sub;ects!!in some cases, competition may be an important factor, in others it maybe new products or an analysis of recent acquisitions. $n all cases, however, yourinvestment thesis must be laid out up front and address your recommendation, pricetarget, conclusions, and the foundation for your conclusions. Any risks should also bespelled out.

Reports do have two very different audiences!!portfolio managers and analysts. Areport focused on only one audience may never be read by the other. 4he followingdiscussion is a summary of ideas about how to write for both audiences!!in most cases,the ideas are only suggestions, but the portfolio manager structure is e6tremelyimportant if we ever e6pect him to read our reports at all.

ortfolio !anager

4he key problem with the P is to grab his attention and to get him to at least read ourinvestment thesis. 4his requires the following

4he industry sector should be prominently displayed on the cover.

$f the stock is small! or mid!cap or international, there should be a verybrief description of the company on the cover.

4he rating on the stock must be prominently displayed on the cover of thereport.

4he investment!related story must be prominently summari@ed in two tofive bullets on the cover. $f he gets past this level, he might read the firsttwo or three pages of the report.

A summary earnings forecast should be on the cover. $t should include atwo!year forecast, the PL#, dividend, shares outstanding, market cap, andso forth.

4he investment thesis and analytical foundation for our investmentconclusions should be spelled out starting on the cover. A catchyheadline can be useful in gaining attention and should be directly tied tothe investment conclusion.

4he investment opinion section should address the following

$t should state your recommendation and outline the most importantreasons for it, such as a forecast that deviates from the consensus, a

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point of view that differs from most observers, a mis!valuation of thestock, etc.

$t should have a Owhat if things go wrongO section.

$t should summari@e your valuation assumptions and present a targetprice.

$t should address the ma;or assumptions in your revenue and earningsforecast.

4he analyst8s name, email address, and telephone number should beprominently displayed on the cover so that the P can reach the analystwithout fumbling through the report to try to find the author.

$f you have grabbed the portfolio manager8s attention by this point, he

may skim the report. Fe won8t read very much, however, so there shouldbe a liberal use of headings andLor comments in the margins that tell thestory even if he doesn8t read a single word of the te6t. 4his is also true ofheadings on tables and graphs!!they should tell the story in the tablesuch as O#arnings hould 4urn p in the %ourth Quarter,J and not ;uststate something like OQuarterly #arnings %orecast.O

Analyst

4he buy!side analyst has a very different set of requirements than the portfoliomanager. hile the same structure mentioned above is helpful in getting his attention,

he generally wants data more than he wants an opinion. 4he general topics that shouldbe covered include &C a company profile that e6plains why the company is successfulor unsuccessfulC, 'C divisional or product line breakouts, *C a discussion of

management, :C a detailed financial forecast, (C a valuation analysis, and 2C for someindustries, a discussion of regulations.

$n general, there is no such thing as too much data or too much analysis. =raphs andcharts can be helpful in telling a story, but the raw data is usually even more importantsince most analysts have to write their own reports and normally don8t have the time tochase down the data with which we routinely work.

Company Profile

hatever else this section does, it must address one key issue ow does thiscompany make money# Does it sell performance, hopes and dreams, or the bettermousetrapG hat have been the keys to its success!!do one or two products andLorservices account for the ma;ority of its businessG hat products are the key to itsfutureG

Among the other basic questions are the following

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Fow well does it do in its basic businessG $s it growing slower or fasterthan its industryG $s its success tied to the market in which it operates orcan it stimulate new demand in other markets andLor geographiesG $s itearly to market with new products or is it a Ome tooO companyG

hat is its competitive positionG $s it gaining or losing shareG $s itsmarket in its infancy or is it matureG

hat are the key determinants of financial performanceG hat are thekey levers for the future!!revenue growth, market share, e6pense control,e6pandingLcontracting margins, financial leverageG

hat are the company8s near!term and long!term goals!!product,markets, growth, financialG

$s the company planning to diversify its businessG Fas it done it beforeand was it successfulG $s it planning acquisitionsG Fas it successfullyacquired businesses beforeG

$s it e6panding geographicallyG Are its international operations growingfaster than the . .G Are they as profitableG

$n a regulated industry, what is happening in ashington and at thestateLlocal levelG

Divisional/Product Breakout

4his section should focus on the ma;or divisions andLor the ma;or product lines in eachdivision. At a minimum, it should address the sales and earnings growth of thecompany8s divisions and geographies as well as the revenue of its ma;or product lines.%or each ma;or divisionLproduct line, it should also consider

hat is the range of forecasts by product line for sales, margins,profitabilityG Fow is profitability tied to changing volumesG hat impactdoes product mi6 have on overall profitabilityG

here are the company"s products manufacturedG $s there any currency

impactG hat changes have there been in material costs, labor, fuel,overhead, etc.G

Are RED e6penses increasing or falling rapidlyG $s there a substantialchange in RED planned for new productsG Are abnormal e6penses beingincurred due to opening new plants, changes in product line, etcG

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hat can be learned from the company8s customers, suppliers, orcompetitorsG Are its products being challenged by new competitors, newtechnologies, or new business ideasG

ana!ement

hile this is sometimes not particularly important for very large!cap stocks, it is crucialfor small! and mid!cap companies. 4his section should address those issues that arecentral to your investment thesis!!simply naming the management and their e6periencegenerally does not add much value.

Fow is the company structuredG Do the structure and compensationprograms provide adequate incentiveG Are there controls to reduceunpleasant surprisesG

ho are the key managementG hat is their e6perienceG Fave theydone this beforeG hat are their ages and compensationG Do they ownmuch stockG

Fow deep is its understanding of the markets in which it operatesG $s iton top of competitive trendsG Fow does it deal with changing economictrendsG $s the past performance of the company the result of currentmanagementG

hat is the management8s ability to forecast its business and to controlits manageable costsG hat are its assumptions about future trendsG

Are they reasonableG

Are current problemsLerrors being glossed overG

$s management concerned about good relations with investorsG $smanagement8s image being accurately communicated to investorsG

Earnin!s "orecast

A short!term quarterly forecast the previous, current, and ne6t fiscal yearCincluding year!to!date results should be made. Pro;ections should showcomplete quarterly income statements with a discussion of each ma;orcomponent of the pro;ection.

A long!term annual forecast should be made. $n addition to the normalincome statement, it should consider the following

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$t should analy@e the trend in sales, margins, earnings, etc., withaccompanying rationale. here possible, it should be made by line of business. $f growth is accelerating or decelerating from the historicaltrend line!!whyG 4he discussion should consider changes in thecompany8s ma;or markets, its competition, new products, changes in

e6pense structure, etc. Patterns in sales and earnings should be discussed. #conomic

impact, product cycles, unusual developments, etc., should beanaly@ed.

5onfidence levels of your forecast should be discussed, both relativeto the trend as well as to year!to!year forecasts.

Quality of earnings should be discussed. 5onsider the following

Are reported earnings changes coming primarily from operations, orare changes in other income, ta6 rates, shares outstanding, etc.,unduly affecting reported resultsG

$s the reported growth being generated internally, or is it coming fromacquisitionsG hat is the internal growth rateG

$s financial reporting accurately reflecting the sustainable earningspowerG Fow are inventories, receivables, pension accounting, ta6es,etc., affecting reported resultsG

hat is currency translation doing to its competitivenessG 4o itsreported resultsG

hat is the potential of dilutive equity offeringsG $s the companyrepurchasing its sharesG

"inancial Position and Capital Re#uirements

4he balance sheet and cash flow analyses should focus on those itemsthat are key to your investment thesis and should include quarterlyforecasts if they are required to support your investment thesis. 4hisanalysis may include the following

Fow realistic is the balance sheetG Are assets or liabilities overstatedor understatedG Fow have acquisitions influenced the balance sheetG

Does a ratio analysis!!inventory turns, D 7, current ratio, capitalturns, etc.!!provide any additional insights into the companyG

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hat is the debt levelG $s it affected by short!term swings in interestratesG hat are its repayment obligationsG Does it have adequatecash flow to cover themG

hen will it run out of cashG $s it more likely that it will raise debt or

equityG henG At what rateG Does it pay a dividendG $s it likely to be raisedG 5an it afford itG

A return on investment analysis is often very revealing. $t should includean analysis of capital turnover, return on total capital preta6C, return onequity, and a measure of financial leverage.

Valuation

aluation analysis can differ widely by industry sector, market

capitali@ation, and growth rate. $t should be considered carefully, for thereis rarely only one answer to What should the stock sell for#

hat is the basis for your valuationG hould it be ;udged by relativePL#, absolute PL#, PL# to growth, priceLsales, priceLbook, etcG

Fow does it sell relative to similar companiesG Relative to itshistorical patternG

Fow have changes in the market, interest rates, competitive situation,economic developments affected its valuation relative to its historicallevelsG

Fow would you rate its stability, quality of earnings, growth rate,profitability, etc., relative to its peers and their relative valuationsG

hat are the dominant trends in investor psychology and the structure ofthe market that could influence your conclusions from aboveG

hat is the resultant price targetG

roduction Targets

hile each analyst will develop his or her own approach to generating business,publishing our research is the cornerstone of our business. $t not only increases thetrust of the sales force and clients as well as opening doors to other potential business,it makes you a better analyst.

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$n many respects, publishing is for the analyst, not for the reader. $t makes you thinkand should result in new ways to look at a company or your industry sector. $t testsyour models and forecasts. $t tells you whether your valuation techniques and resultingprice targets make sense. /et net, it tells you how well you are doing your ;ob.

hile the following are only guidelines, $"m always hard pressed to understand howsome analysts think we can generate substantial commissions with anything less

2irst of all, if it is worth talking about, it is worth writing down. $f it is worthwriting down, it is worth posting on %irst 5all. $f it is worth posting on %irst5all, it is worth getting it there before ? ++ a.m. so it has some impact. And ifit is worth all this effort, it is worth e6panding into a published report!!something meaningful!!not ;ust the two to three bullets and a handful ofparagraphs from the %irst 5all note.

There should be a goal to launch a new company every quarter , trimmingunproductive stocks to make room. 4hese reports should be complete andinsightful as described earlier.

There should be ma3or updates at least once per year on your best ideas !!it"shard to convince the sales force and clients that you are up to date on all theissues if you never publish any fresh, ma;or research.

There should be a report published every time you change ratings, changeearnings outlooks, or there is a ma3or event with one of your companies . Aone to two page report is usually not enough.

4arnings previews are required on all your companies . 4hese can be shortunless you are making changes to estimates or ratings. 5ombining theseinto a single report that is published two to three weeks before the firstcompany reports is an efficient approach, and you may want to considerfollowing up with a brief %irst!5all!only note the day before results are due.

*t is absolutely mandatory that we respond quickly to all earnings reports--there is no e6cuse for not having a %irst 5all note within hours after earningsare released, and the published report should be out the ne6t day.

*ndustry reports are crucial in convincing clients that we really do know what

we are talking. 4his is always the best approach to use when launchingcoverage on a new sector, and is particularly effective when launchingcoverage on two or more stocks simultaneously. $f your industry does notlend itself to at least a quarterly report, consider a periodic overview, focusingon one or two ma;or issues.

5indless monthlies /quarterlies0 are 3ust that--mindless. Repackaging your%irst 5all notes or short reports with a few statistics offers no added value to

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anyone, nor does simply regurgitating a handful of government statistics.ake these reports into full!blown industry reports or don"t make them at all.

#aluation) rice Targets

$n general the treet has gotten la@y in doing its valuation work and setting pricetargets. ost research today simply asserts a valuation such as Ithis stock should sellat a &+0 premium to its peers,J or Ithis stock should sell at a '+6 PL#.J hile thesestatements may in fact be true based on your analysis, it is inadequate to simply makean assertion without the analytical backup. 4here are several good approaches tovaluation analysis such as

Build a table of comparable stocks, highlighting the valuation technique sC

you think are most appropriate such as PL#, PL#!to!growth, cashflowLshare, enterprise value, etc.

Present a graphical history of how the stock has traded using suchapproaches as PL# bands, relative PL# bands, etc.

se a generally accepted mathematical approach such as the formula fortarget PL# based on a company"s growth rate versus that for the EP.4his is one of my favorites since it is rarely used and is alwaysprovocative.

Devise your own proprietary approach. $ once worked with an analyst thathad a very convincing analysis that the price of Deere, 5ase, and otherfarm equipment producers closely followed the price of corn.

$n any event, do something thoughtful that will help the sales force believe in your storyand help clients look at the world through your eyes. ost important, do it for yourself!!sometimes you will be surprised how far from reality your targets are when put under amicroscope.

etting target prices, however, also needs a time hori@on to make them effective. 4hiswill derive from a combination of your own style!!are you a deep value or earnings

momentum analyst by nature!!and the predictability of the stock and its earnings. 4imehori@ons for technology stocks should probably never be more than si6 months unlessyou are a masochist, while looking out &'!&? months is common for packaged goods.

5onsider the following

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5arefully look at the predictability of your industry sector and the inherentvolatility of the stocks. +0 Absolute1 &+0 Relative :?0 PL# Related **0 5ash %lowL#nterprise alue Related &'0 PLBook Related &+0 7ther

Ranking of All Responses

P/E-To-Growth 20% P/E 19 EV/EBITDA 12 P/B 11 EV 11

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P/S 6 R ! P/E 6 EV/E-To-R"E 3 R ! EV/EBITDA 3 #r $ &h #!ow 3

P/$E 2 R ! P/B 1 EV/EBITDA-To-Growth

1

'( !) 1 D$# 1 Tot ! 100%

4he above table clearly demonstrates that a one!si@e!fits!all approach to valuationsand targets is not appropriate. $t also clearly points out that relative valuationtechniques are no longer the norm, and if we want to improve our impact on mostaccounts, we should focus on absolute techniques. 4his is not to say that we shouldabandon relative PL# and other similar techniques, but that we should know the clientand tailor our discussion to meet its needs.

The A'Cs of Supervisory Analyst Approval

riting research to meet . . regulatory requirements is very simple!!there are only ahandful of rules that we have to adhere to, and by so doing, your research will beproduced with virtually no time lag. 4he rules are as follows

/ %ou must be careful to not make promises or guarantees.

Bad I...the stock will trade up to &'+...JI...sales will increase by &(0 this year...JI...margins will improve when the new plant opens...J

=ood I...in our opinion, the stock could trade up to &'+...JI...we estimate that sales will increase by &(0 this year...JI...margins should improve when the new plant opens...J

$t"s ;ust that easy. Adding Iin our opinionJ or Iwe estimate thatJ will take care ofmost offending promises. $n many cases, simply using the word IshouldJ instead

of the word IwillJ will also fi6 the problem.0/ Forecasts and estimates must be clearly indicated as such.

4his is really simple. All you have to do in tables and charts is append the letterI#J to all forecasts and estimates. $n most cases, this will simply be the headingof a table or the labeling of a chart such as 01123.

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ource 9epartment of 8ommerce

or whatever is appropriate as the source of the data.

Client Calls and Client #otes

$t is e6tremely difficult for the firm to get a substantial number of client votes until wehave appro6imately &(+ mid!, large!, and mega!cap stocks under coverage. 4his is notto say that we shouldn"t focus on accounts where we can make a difference, but abroad!based client calling program would not generally be a good use of our time at themoment. e will develop with sales a very focused target list of accounts, however,where we can make a difference and your counterparts in these accounts should becontacted at least once per month.

hile our e6pectations for votes will remain modest until our coverage list isrebalanced, the information that you get from the clients can be invaluable

Kou will develop a handful of relationships that you can use to bounce ideasoff of and to fine!tune your analysis before you take it public through thesales force.

By talking with clients regularly, you will always find new ways to think aboutissues, find holes in your research, and tap many une6plored areas whereyou can make an impact by beating your competitors to the punch.

By speaking with your best clients!!friendliest!!first, you can fine tune yourpitch and have more and more impact as your client list grows.

Kou will be able to learn what your competitors are thinking and oftentimescan get early warning on changes in thinking about a stock or sector beforethere is general awareness, thereby, giving you some lead time to ree6amineyour analysis and have additional conversations with the company.

9ealing &ith The ress

The press is your friend if you use it correctly .

%ind out who your counterpart is at the , Dow ones, Reuters, Bloomberg, and5/B5 at a minimum. =et their telephone number, %AS number, and e ail address,and use them.

5allL%ASLe ail them every time you have an important message on a visible stock.4he priority is %irst 5all, salesLtrading, Dow ones, Reuters, Bloomberg, 5/B5, clientcalls, , or other print media. hile this may seem somewhat backwards at first,individual client calls are the least leveraged while %irst 5all and salesLtrading are the

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most leveraged and most focused. Dow ones, Reuters, Bloomberg, and 5/B5 haveterrific impact, but we lose the proprietary impact on targeted clients if we go therebefore %irst call and salesLtrading..

Felp the press do their ;ob and you will be ama@ed how much they will help you doyours. 4hey are a tremendous source!!particularly the print media!!for what is going onin companies and will regularly ask for your views on what it means if a company isthinking about doing an acquisition, adding a product line, and so forth, oftentimes wellbefore anything is announced publicly.

$n dealing with the press, you must think in sound bites!!you only get one chance to beincluded in an article or interviewed on 5/B5. Kour %irst 5all bullets are the best placeto start, but ;a@@ it up if necessary. ith a proper sound bite, your quotes will both be inthe first and last paragraphs of a written piece by the or Business eek or will bethe lead in a news story over Dow ones or Reuters.

$f you are asked a controversial question, and you feel flustered, tell them you are busy,ask for their deadline, and tell them you will be back to them in plenty of time to make it,take a breather to collect your thoughts and A- AK call back.

%ind your counterparts in the trade press and A- AK be helpful!!this is critical tobuilding brand name recognition for yourself as well as the firm and is a crucial part ofbuilding the franchise.

Put the press on your mailing list!!both financial and trade press. Kou will be surprisedhow often a piece of your research will turn into the basis of a feature story, particularlyin the trade press.

Analyst)Sales #ote

#very si6 months we will ask sales to formally evaluate our performance in several keyareas see attached sample formsC. hile the results will not be used directly todetermine bonuses, they will be used to help focus our attention on areas where weneed improvement as an organi@ation, and more importantly, as individual analysts.

e will also ask the analysts to formally evaluate the sales force on the same scheduleso that they can also become more effective in working with research.

4he details of the votes will be kept strictly confidential, and only summary informationon their own performance will be available to individual analysts and salespersons.

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Sample (esearch #ote :'y Sales/

DateMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM

Analyst"s /ameMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM

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Sample Sales #ote :'y (esearch/

DateMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM

alespersonMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM

nderstands y $ndustry MMMMMM

nderstands y 5ompanies MMMMMM

illingness to ork with /ew $deasL5oncepts MMMMMM

akes 4imely 5alls with $mportant $nformation MMMMMM

ets p Appropriate 5lient 5ontacts

-ist of 5ontactsLPhone /umbers MMMMMM

5lient isits MMMMMM

5ompany anagement isits MMMMMM

Provides seful %eedback from 5lients MMMMMM

& H Poor, * H Average, ( H #6cellent

AnalystMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM

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'usiness lan

#very analyst and ;unior analysts getting ready to launch coverageC will be asked toprovide an updated business plan every si6 months. hile the plan will not be useddirectly in figuring compensation, it should become a critical part of each analyst"s

thought process about how he wants to run his business and how he wants to bemeasured.

4he plan will focus on coverage, votes, production, client contacts, working withcorporate finance, retail commissions, and press contacts. A spreadsheet will beprovided to assist in generating the plan and results will be formally reviewed duringperformance reviews to measure each analyst"s progress against the goals that hesets.

equity research handbook (1)

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