Use This ADViCE™: 5 Elements for Conveying Stock Calls Successfully
We can make countless recipes in our kitchens, often which require ingredients we’ve never used before, but as a general rule, they don’t require we purchase new pots or pans. When it comes to communicating stock calls, I find many analysts essentially buying new cookware with each new message, which is a drain of their time and talents. When I get asked by directors of research or portfolio managers to train their analysts to “present” or “write” better, this too is often an example of buying two sets of cookware for the same task.
If we distill it down to its most basic form, analysts are communicating stock calls in order to get recognized (by the PM for buy-side analysts and by the client for sell-side analysts). I’ve learned institutional investors (PMs and buy-side analysts) are looking for just a few key elements in every stock communications and so there isn’t a need to introduce new methodologies unique to presenting at an investment committee versus writing a research report.
Communicating stock calls isn’t complicated if you know the five key things institutional investors are looking for
In helping analysts use just one simple method for communicating stock messages in a manner so they get recognized, I created the ADViCE™ framework below (for anyone who read my book, the ADViCE™ framework is the second generation of the CASCADE™ framework). It’s important to note, analysts need to have conducted high quality research before moving onto communicating a message, or we’ll just be putting lipstick on a pig. For that reason, I encourage analysts to follow the ENTER ™ framework to ensure their research meets or exceeds a quality threshold before moving onto the ADViCE™ framework below.
| Element | Put Into Action | Examples |
|---|---|---|
| Aware: Make others aware of alternative scenarios and views, as well as adjustments to your thesis | This is about exposing elements that might not be easy or comfortable:
| My downside scenario results in a stock price of $18 (10% below yesterday’s close), which is based on…[explain], while my upside scenario is $22 (10% above yesterday’s close), which is based on…[explain] I have a high degree of confidence in my call because I have spoken to 3 industry sources independent of the company, who all confirm this trend. |
| Differentiated: Explain how you differ from the consensus thinking about the stock and its catalyst(s) |
| My one-year price target of $45 is derived from a valuation multiple of 15x forward earnings (which is 10% above the company’s forward multiple over the past 3 years) applied to my EPS forecast of $3.00 (10% above consensus). As the company takes further market share in the premium segment of the market, we expect consensus expectations to rise to our estimate and the company to be rewarded a higher valuation multiple because this segment has double the ROIC of the company’s existing business. |
| Validated: Support key points with independent research | Our view is supported by our quarterly survey of 300 large industry players, where the average price increase for new contracts is up only 1%, compared to consensus expectations for a 4% increase. We believe this difference will cause the company’s EPS to be revised down 10% next year. | |
| Conclusion-oriented: Be conclusive about stocks and their catalysts |
| Start with conclusions such as:
|
| Easy to Consume: Make it easy for others to consume |
| Checklist to Ensure You Are Concise:
|
My hope is the ADViCE™ framework will:
- Ensure you’re always communicating in a manner institutional clients want to consume (give the PMs what they want to consume, not necessarily what you know)
- Reduce your workload because these principles allow you to create only one message regardless of delivery method (reports, presentations, face-to-face conversations, etc.)
This Best Practice Bulletin™ targets #4. Motivate Others to Act of GAMMA PI™, within our Pathway to Success Framework
Let me know if this Best Practice Bulletin™ helps and how I can improve upon this best practice. If you’re interested in exploring this topic further, AnalystSolutions provides equity research training with a specialized workshop to help to deliver your message, Communicate Unique Stock Call Successfully So Others Take Action.
Improve you or your team’s stock picking and communication skills with our equity research analyst training tools, which includes workshops such as the one above, as well as our GAMMA PI™ assessment and one-on-one coaching. Also, consider ordering the book that inspired the founding of AnalystSolutions and the Best Practices Bulletin: Best Practices for Equity Research Analysts.
Visit our new Resource Center to find more helpful articles, reference cards, and advice towards your growth as an Equity Research Analyst.
©AnalystSolutions LLP All rights reserved. James J. Valentine, CFA is author of Best Practices for Equity Research Analysts, founder of AnalystSolutions and was a top-ranked equity research analyst for ten consecutive years
