In chapter 1, you learned about What is an Equity Research Report, different types of equity research reports, and contents of an equity research report.
Already, you’re ahead of the majority of analysts who want to write equity research reports.
But now that you have a basic plan, you need to be able to write much better equity research report.
Chapter 2: How to Write an Equity Research Report
In this chapter, I’m going to explain how to start writing an equity research report. I will start with the things that an analyst should think of before starting on the report. I will explain the various resources and methodologies that an analyst would need while writing an equity research report.
OK. Now that we have understood what exactly an equity research report and its various types are, let’s try to understand how to go about writing an equity research report.
An equity research analyst writes equity research report based on the information available.
Available information means all the information available to public or through databases like Bloomberg, Factiva, Lexis Nexis, OneSource, financial newspapers, company websites, industry association website etc.
The analysis/view of the equity research analyst depends on his/her way of analysis and the optimal usage of available information. Every report is written based on various assumptions and the current scenario.
But before we go to actually discussing how to write the report, I think there are certain important things that you have to remember:
1. Do not just report – there is already an abundance of journalists
First and foremost, you need to keep in mind that there is a difference between equity research report and reporting.
Remember that there are plenty of journalists already doing their job on reporting. Hence, your report should ideally provide an insight and opinion, part of which will come through your valuation models, part through your estimates, and from your analysis.
2. Showcase your understanding of how and where the company fits in the economy and the industry
For this, it becomes imperative that your report is well written and is able to clearly communicate your ideas.
Remember that the SEC requires all views to have a practical and realistic basis. Hence, the art of differentiation is a must here.
Unless your idea is different, the investors would not have any reason to be interested in your idea.
Differentiate your knowledge of the industry and the company.
3. Write clearly and concisely to communicate your ideas
Do not beat around the bush and give long paragraphs which look like essays.
Be clear on your thought process, decide what exactly you want to include in your report and communicate your advice or idea very clearly.
The reader should be able to take a decision after reading your report.
4. Report should also be clearly formatted and segments should be clearly labeled
Make life easy for the reader by segmenting your report properly.
Each segment should be clearly titled and should lead the reader on the next segment.
Also please make sure that you format your report well. No one wants to read a report which looks tacky and unprofessional.
5. Choose your company/sector well
Always choose a company that is traded regularly on the stock exchange.
People want to read about companies they would like to buy or sell. At the same time do not follow the crowd in writing about the companies on which every analyst in town is writing about or has written about.
Try to find interesting companies that are probably currently undervalued but could be good investment opportunities for your clients or readers, or companies you believe are already over valued and are better off sold.
Resources – Collecting Intelligence for the Report
So now that you have decided which company or sector to write about, how do you go about gathering information or intelligence on them?
A good research report must contain thorough research of the suppliers, competitors, regulators and customers.
You need to exploit all the possible conventional and unconventional information sources available. Now, let us understand what exactly these resources are.
Basically there are two main areas of gathering research intelligence – secondary research and primary research.
i. Secondary research:
Secondary research is research which is carried out with already existing data.
The researcher need not go on the ground since all the information collected has been already documented or published. Sources to collect secondary research intelligence include:
- Company website: This should be the first source of information. Go through the company website thoroughly to understand everything about the company.
- Company Reports: Every company periodically files their financial statement and various other documents with the company registrar. Make sure you study these documents to get all the latest intelligence on the company
- Government resources – websites and Freedom of Information Act: There are various government bodies who publish various intelligence data points on all the key sectors and industries. Make sure you get all the latest information like IIP (Index of industrial production) figures on the industry that you are writing the report on.
- Databases: There are various databases that you can consider to collect quick information. Some of the popular paid databases include Bloomberg, Factiva, Lexis Nexis, OneSource, etc. There are some other financial portals such as Yahoo Finance and Google Finance which compile a lot of information about all listed companies. These sources give ready analysis of various financial ratios as well as transcripts of interviews with key company personnel.
- Financial newspapers and magazines: Financial newspapers such as The Wall Street Journal and Business Standard and financial magazines such as Businessworld and Outlook money also are good sources for intelligence on companies and industries.
- Industry association website: Always make sure that you visit the industry association websites as they tend to publish a lot of useful data especially related to production and consumption of products. Some associations like SIAM (Society of Indian Automobile Manufacturers), IMTMA (Indian Machine Tool Manufacturers’ Association) and NASSCOM (The National Association of Software and Services Companies) have been providing excellent information about their respective industries.
Many times gathering intelligence just from secondary sources is not really enough as many times this intelligence could be dated.
To get specific real time intelligence it’s imperative that you use primary research techniques.
ii. Primary research
Primary research includes getting the information straight from the horse’s mouth. It means talking to the industry players, interviewing them, engaging them and having discussions with them to get relevant and up to date intelligence.
- Talk to the correct person in the company: It’s extremely important to talk to the correct people to get the required information.For example to get information on order booking, you should be talking to someone in the sales department while talk to someone in the accounts department to gather intelligence on key financials. It’s also important to choose your respondent correctly. The more senior person you speak to the more reliable the intelligence but senior people at the same time might not be ready to divulge a lot of information. People lower down the line might be ready to talk but might not give relevant and reliable intelligence.
It is also extremely important in primary research to validate your intelligence either from some secondary data or by talking to multiple respondents.
- Visit the premise or factory: If possible visit the premise or the factory to get first hand intelligence. A face to face interview will yield much better intelligence than a telephonic interview. Also make it a point to try the company products or services wherever possible. This will really help you create your own perceptions and analyze the company better rather than depending on other people’s perceptions.
- Interview Suppliers: Many times it a very good idea to interview the suppliers of the company. You might be surprised at the amount of intelligence you might gather. Suppliers many times will tell you things that people in the industry might not tell you. You might get intelligence on the company’s payment records, financial status, problems the company is facing, etc from suppliers.
- Interview Competitors: Sometimes it also makes sense to interview some competitors to see what intelligence you can gather on your selected company.
I hope you are clear on the different methods that you can use to collect intelligence on the company or industry you are writing the report on.
You could use some or all the techniques we discussed above depending upon the time and quantum & quality of intelligence available with you.
Now that you are clear on what resources to use, in the next chapter I will start explaining how to start writing the actual report.
- Equity research report writing is a skill. Before writing equity research report, you need to have intelligence.
- Build your intelligence through primary and secondary research.
- Acquire report writing skills. Check how the skill is different from reporting.
Now You Try It
I hope you can see the potential of equity research report writing skill for your career.
Yes, it takes hard work to create something great.
But with this skill you already know ahead of time that your hard work is going to pay off.
I want you to read financial magazines and dailies to gather more information about the company you are researching on.
At the same time, build a network, so that you can acquire primary information too.
If you have a question or thought, leave a comment below and I’ll get right to it.
Image: I am I.A.M.
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