Equity Research is a rewarding career.
To keep up, you need a strong foundation with the judgment to think critically, act independently, and be relentlessly analytical.
That’s why I wrote this guide — to empower you with the equity research(ER) report writing skills to stay ahead in the equity research career.
There is almost NO guide available that teaches you how to write an equity research report. From textbooks to online video tutorials, you can check and let me know if you find one.
And, I felt that I should write a detailed and step-by-step guide— a guide that really starts at the beginning to equip already-intelligent analysts with a healthy balance of conceptual and practical advice.
The Advanced Guide to Equity Research Report Writing takes your writing to the next level.
I wrote this guide for an audience of equity research analysts, investment banking professionals, industry analysts, market research professionals, business management students, and freelance writers.
Most of all, I want you to walk away from this guide feeling confident about your equity report writing skill.
This chapter explains what exactly an ER report is.
The questions like—Who makes it? Who reads and uses it? What are the different types of equity research reports?—are answered clearly and elaborately.
It briefly talks about the various key contents of an ER report.
And lastly, it explains the need to provide a disclaimer at the end of an ER report.
So before understanding how to write an ER report, let’s try to understand what exactly an equity ER is.
FINRA, the Financial Industry Regulatory Authority, defines an equity research report, in Rule 2711 (a)(8) as,
"A written or electronic communication that includes an analysis of equity securities of individual companies or industries, and that provides information reasonably sufficient upon which to base an investment decision."
Readers of Equity Research, more so than anything else, identify trends that make investment decisions easier to justify.
In simpler words, equity research is a document written and published by a brokerage house or securities firm for its clients to help them to make better decisions regarding which stocks to choose for profitable investment.
The report should be such that it should convince the client to make a decision.
The report should be crisp; the point of view should be clearly structured and articulated concisely.
In the investment industry, equity reports usually refer to ‘sell-side’ research, or investment research created by brokerage houses.
Such research is circulated to the corporate and retail clients of the brokerage house that publishes it.
Research produced by the ‘buy-side’, which includes mutual funds, pension funds, and portfolio managers, is usually for internal use and is not distributed to outside parties.
In the above paragraph, we saw terms such as ‘sell-side’ and ‘buy-side’.
Let’s quickly understand what these terms mean:
There are two main types of equity research reports:
Sell-side reports are the most common type of equity research reports in circulation.
They are normally produced by investment banks, typically for their clients to guide their investment decisions.
A sell-side analyst works for a brokerage firm or bank which manages individual clients and makes investment recommendations to them.
Sell-side analysts issue the often-heard recommendations of "buy", "hold", “neutral”, or "sell".
These recommendations help clients make decisions to buy or sell stocks.
This is favourable for the brokerage firm as each time a client takes a decision to trade; the brokerage firm gets a commission on the transactions.
Click here to see some examples of sell-side reports
The ‘buy-side’ reports are internal reports, produced for the bank itself, and are guided by differing perspectives and motivations.
A buy-side analyst generally works for a mutual fund or a pension fund company.
They perform research and make recommendations to the money managers of the fund that hires them.
Buy-side analysts will verify how promising an investment seems and how well it fits with the fund's investment strategy. These recommendations are made exclusively for the benefit of the fund that employs them and is not available to anyone outside the fund.
Within the buy/sell group, there are other types of reports like initiating coverage reports, standard reports, Issue reports, Investor notes, and sector reports.
The initiating coverage reports are conducted on firms that the bank has begun following and are typically more comprehensive in nature.
Initiating coverage reports analyze a company's historical financial information, order books, efficiency, SWOT, cash-flows, and future earning potential, basis which it estimates the future earnings of the company and its P/E multiples.
After an initiating report is produced standard reports will follow for as long as the brokerage house continues to track the stock.
Stocks that are tracked are typically part of an index like the SENSEX or are amongst the top stocks in an industry as these are the stocks that investors care about and are traded in larger volumes.
These reports are issued when generally companies announce earnings each quarter (Quarterly earnings reports).
These reports are published a few times in between for incremental information and news.
For example - investor conference companies hold a big M&A deal or a major new product announcement from a competitor.
These are usually short-run updates and are typically just quantitative in nature.
A sector report is a document that evaluates a given industry and the companies involved in it.
It is often included as part of a business plan and typically seeks to establish how one company can gain an advantage in industry through detailed research on competition, products, and customers.
Now that we have understood the different types of equity research reports, let’s try to see the contents of an ER report.
An ER report should not be more than 10 to 15 pages long and should be very crisp and concise.
It should give the reader a clear understanding of the opinion of the analyst writing the report.
An ER report typically has the following contents:
1. Analyst opinion and summary
2. Key highlights of the company
3. A snapshot of the industry
4. Financial ratio analysis
5. Financial Modeling and Valuation analysis
6. Risk factors
7. Disclosure and rationale of rating
Usually, most of the equity research reports have this information; however, there is no hard and fast rule in which an ER report should be written.
We will study in detail (with examples) how to write each of these segments of an ER report in the forthcoming chapters.
As every ER report is an investment document, and investors use it to make decisions for buying or selling securities based on it, it is important for the report to have certain disclaimers to show un-biases of the analyst writing the report.
Some typical disclaimers are as follows:
· Every ER report entirely reflects views and personal opinions of the analyst as on the date of publication
· The equity research analyst does not have an interest in the shares of the company
· Compensation of the analyst is not linked directly to any specific research recommendations contained in the report
Financial Analysts or equity research analysts working in brokerage firms or sell-side analysts write equity research reports.
Equity Research Report writing
After completing the fundamental analysis, financial statement analysis, ratio analysis, and valuation, the last part of the equity research process is writing equity research reports.
As an equity research analyst, you need to analyze the industry and the company first and then write the stock research report. This step is paramount in your equity research analysis career.
This is important to write the equity research reports in such a way that your clients understand every word of it. It’s also important to include relevant analysis that you’ve done in the report.
Let’s see each step of writing an equity research report in detail.
a) Macroeconomic Analysis
b) Checking public information of the company
c) Discussion/ interviews with company management
d) Prepare a 5-year cash flow model and earnings forecast model
e) Review your operational and financial assumptions
f) Assess management and competitive environment, buyers, suppliers, substitutes, porter 5-forces model that tells you the competitive advantage of the company.
1. Use intrinsic valuation—Discounted Cash Flow(DCF) method
2. Relative valuation
3. sum-of-the-parts valuation method, wherever required.
I’ve created a list of pointers purely based on my experience and observations and a bit of research about dos and don’ts while writing an equity research report.
Before writing the report, have a clear view of the company in terms of—Investment rationale, risk assessment, key growth drivers, cost drivers, and revenue drivers.
Clearly write the company’s name at the top of the report and mention your recommendation—buy, sell, hold. You can also use the words—outperform, underperform, neutral or accumulate based on your valuation.
Have an image of an equity research report in your mind, and so you won’t miss these details.
Usually, there are templates available in your company and you need to write the report using these templates.
You need to mention the target price based on your valuation along with the recommendation.
Write clearly your investment rationale. Why do you think the share price will go up/down?
Include a price chart of the stock that will show the last 52-weeks’ share price movement.
Mention the analysis of the company’s business model and how will it perform in the next 2-3 years.
Include important ratio analysis of the company and 52-week high-low share price on a stock exchange. Include market capitalization, Enterprise Value(EV), Earnings Before Interest Tax and Depreciation (EBITDA), EV/EBITDA, and dividend yield (%)
Analyze the company’s product profile, its various segments, and brands. Include current sales and forecasted revenue figures, cost, market size, company’s market share, competition, the company’s performance in domestic and other markets.
Cover the company’s fundamental analysis with supportive data.
Perform DCF analysis and relative valuation. Relative valuation should be done with the company’s peers on the basis of Price-Earnings ratio (P/E), Price to Book ratio (P/B), Price to Sales (P/S), Return on Equity (ROE) and Return on Capital Employed (ROCE).
Write proper reasoning for your recommendation. For example—Why buy the stock or why not to buy the stock. So, your reasoning has to be strong.
Write what can unlock/increase/reduce the value of the company.
If the company is battling any case, write what could be its effects on the stock price.
While writing industry reports, write the points which are common for all players in the industry, for example, regulatory limitation, excise duty, oil prices, etc.
While writing the equity research report, assume that the reader is new to the company and he doesn’t have any idea about its business. So, your report should include precise information about—product, financials, management, market, future plans of the company, growth estimates, and the risk factors of the company.
In short, as an equity research analyst, your equity analysis report writing process should be structured and you should follow the dos and don’ts mentioned in this post.
If you have any queries, Speak Your Mind.
I hope you can see the potential of equity research report writing skills 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 give the skill a try and let me know how it works for you.
If you have a question or thought, leave a comment below and I’ll get right to it.