In chapter 2, you learned about How to write an Equity Research Report and some important things to remember while writing equity research report.
Already, you’re ahead of the majority of analysts who want to write equity research reports.
But now that you know what is an equity research report and how to write it, you need to be able to write much better equity research report.
Chapter 3: Analyst Opinion and Summary
In this chapter, I will cover what information to include in the summary page like stock analyst ratings and recommendation (outperform, hold, overweight, etc.) target price, a financial snapshot, company overview and performance bullet points in the coverage period. I will also talk about the importance of having a catchy headline to start the report with.
The first thing that you have to understand when you start writing the equity report is that you need to give a crisp and clear beginning.
Remember - Well begun is half done!
Beginning a report well makes it easier to do the rest.
Once you have begun a report well, you do not need to put in much more effort to finish it.
It also gives the reader a clear perspective as to what to expect through the report.
Designing the structure first will save you time and improve the quality of the report. So please make sure you put a lot of thought as to how you want to structure your first page.
If the reader doesn't find the first page interesting, there is a big possibility he/she might not go past it.
Remember this part is like the starter to your main course. It should make the reader want more.
The first page of your report should be like a snapshot or summary of the whole report.
The first page should definitely contain the following parts:
- An opinion or a clear investment idea
- A target price
- A catchy headline
- A summary of the investment case
- Key data about the company
I have tried to show the placements of these key elements on the first page of a specimen equity research report which will help you structure your own report.
This report was made by Avendus on Cipla in August 2013. I’ll look at each of these elements and see how to structure these in the report.
Now, if you look at the above example, you’ll see that every element is clearly demarked. Each element is unambiguous and is making a point to the reader.
When you start writing this section, try to use the SPQR technique. SPQR stands for
Situation What does the reader know?
Problem What has changed?
Question What would the reader ask you as a result?
Response Your message
If you ask these questions to yourself before starting on this section, you’ll be able to write a very relevant and useful report.
You will be able to clearly decide how to structure and compose the above element of the first page.
Let's look at each element and see how to address them.
a. An opinion or a Clear Investment Idea
An opinion is the most important element of an equity research report.
The reader wants to understand what the analyst thinks about the company.
Just providing ratio analysis or by providing latest news related to the company is not enough.
The readers need a direction or advice as to the attractiveness of the company stock.
So, make sure you are clear on what you think about the company and provide your advice clearly. It could be ‘Buy’, ‘Sell’ or ‘Hold’.
While deciding on your opinion, make sure you use the deductive as well as the inductive techniques.
Inductive reasoning is reasoning in which the premises seek to supply strong evidence for (not absolute proof of) the truth of the conclusion. Below is an example as to how you can use the inductive reasoning technique to decide your opinion on the stock.
While the conclusion of a deductive argument is supposed to be certain, the truth of an inductive argument is supposed to be probable, based upon the evidence given. Below is an example as to how you can use the deductive reasoning technique to decide your opinion on the stock.
b. Target Price
The price target is the price an analyst believes the stock will achieve during their investment time horizon, which for most firms is 6-12 months.
While price targets are useful, most investors find more value in an analyst's conviction level or in the ratio of upside to downside.
For example, if you were a sell-side analyst, you would seldom have one stock with 10% upside to its price target that you were more favorable to than a stock with a price target 15% above the current price. The rationale is that you have more conviction in the 10% upside stock.
So how is target price of a company, calculated in equity research reports?
Target price is based on the valuation of the company.
Valuation actually means how much is this asset worth?
Valuations can be done in many ways but primarily can be categorized as:
1. Fundamental valuation
The comprehensive and market agnostic valuation.
Fundamental valuation is driven more by intrinsic valuation making financial projections.
2. Relative valuation
Quick way to estimate today's value.
Relative valuation is not getting into financial projections but comparing valuations of assets relative to each other.
There is a big assumption underlying this methodology, that market is correctly valuing the assets.
Read more on relative valuation.
Make sure you provide your target price upfront and also provide a rationale to it.
c. A Catchy Headline
It is very important to give a catchy head line to your report.
Most of the times this is the first thing that an investor might read when he starts to read the report.
Make sure that this headline is catchy but at the same time relevant.
It should basically be the hypothesis to your recommendation. It should be in sync with your investment rationale.
Below are some examples of catchy headlines:
If you see the above examples, it is clear what the analyst wants to say about the performance of stock in one single sentence.
Likewise, always take a moment to think about what is the central theme or the key trigger that you want to share with your readers.
d. A Summary of the Investment Case
It is always a good idea to provide a brief summary of your investment rationale.
Just below your headline, always give in brief an explanation as to why you have recommended a certain action for the stock.
See the below example:
Here the analyst has clearly explained the logic as to why he has recommended the price of INR 450.
He has explained that even though the market environment had been tough, Cipla’s domestic sales have been growing. He has also provided other rationale which supports his recommendation.
Whenever you write an equity report, remember that you have to always provide intelligence that will support your recommendation or hypothesis (Read Chapter-2 for this).
When you write this particular part, make sure you cover all the key drivers or challenges that the company faces and also write a line or two about the industry in which the company functions.
Also write about the latest financial performance and the expected growth of the company in brief.
Here is another example of a summary of an investment case. Here the analyst has gone into greater detail to explain his investment rationale in the below summary.
He has also written about elements such as key investment areas for the company, risks that the company faces, a brief on the valuation and also a quick snapshot of the Pharma industry in India.
The key to this section is to be brief but at the same time provide enough intelligence which backs your recommendation.
e. Key Data about the Company
Always provide a brief on the key market and financial data of the company on the first page itself. This way the reader can quickly scan the data without having to go through the entire report.
Here you can provide information such as the company’s code on various data basis such as Bloomberg, Reuters, etc.
You can provide information on the company’s performance on the stock exchange including data like the average volume traded or average value of the stock in the time frame studied.
In this example the analyst has provided this information for the last 3 months.
You can get this information by looking at websites of stock exchanges like the BSE or NSE or even on financial portals like Bloomberg and Reuters.
You can also provide data on the shareholding pattern of the company. This information is easily available in the company’s reported financial statements or on its website.
Here the analyst has provided a chart which compares the share price movement of the stock compared to the SENSEX.
You can also provide a comparison of share price movement with key competitors which will give the reader a quick perspective of the share price movement.
Again this information can easily be got from stock exchange websites or financial portals.
Further you can provide a quick snapshot of the financial performance of the company with past performance as well as future expected performance.
Make sure you include key ratios such as PE ratio (Price Earning), ROCE (Return on Capital Employed) and ROE (Return on Equity) which will give a clear picture to the investor who is reading the report.
You can calculate these numbers yourself or get them from financial portals which publish these numbers.
Again to reiterate, make sure the information you provide on the first page is crisp, clear and backs your recommendation and investment rationale.
- Your report's first page should include catchy headline, investment rationale, analyst rating/ recommendation, and financial snapshot
- Use deductive and inductive reasoning method to give clear investment idea
- Calculate your target price using fundamental and relative valuation.
Now You Try It
I hope you understood how to write the first page of your report.
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 various equity research reports to understand various styles and methods of presenting your data.
At the same time, start working on valuation methods.
If you have a question or thought, leave a comment below and I’ll get right to it.
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