Use This ADViCE™: 5 Elements for Conveying Stock Calls Successfully

This post covers this element(s) of GAMMA PI: #4. Motivate Others to Act
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.

ElementPut Into ActionExamples
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:
  • Provide alternative scenarios in the form of base-case, upside- and down-side scenarios to show where you could be wrong
  • Demonstrate you’re not oblivious to the other side of your recommendation by addressing why there are alternative views
  • Disclose when you make adjustments to your thesis
  • Convey your conviction level, even if it’s not high
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.
Explain how you differ from the consensus thinking about the stock and its catalyst(s)
  • Minimize communicating when the message is not differentiated from consensus
  • Using the FaVeS™ framework, quantify how you materially differ from the consensus thinking. To have a valid stock call, you must have a superior and materially-different view to the market in one of these areas:
    • Financial forecast
    • Valuation method/multiple
    • Short-term sentiment of the market
  • Explain how your view of the catalyst(s) that will drive your thesis differs from the consensus thinking
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.
Support key points with independent research
  • Without divulging proprietary sources, provide information/data from at least one informed, independent, and reliable source (preferably two or more if it’s critical to your call) to validate your out-of-consensus thesis
  • Quantify as much as possible, including the materiality of your out-of-consensus view
  • Rely sparingly on company management for insights
  • 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.
    Be conclusive about stocks and their catalysts
  • Start your stock communications with conclusions that include:
    • At least one stock name
    • The direction of your view (are you upgrading, downgrading, or just becoming more/less positive)
    • The catalyst(s) likely to move consensus to your way of thinking
  • A stock should be mentioned no later than the second sentence of your communication
  • Mention a stock and its rating in the headline for reports and subject lines for emails
  • Provide a price target and upside/downside vs. the prior day’s close
  • Start with conclusions such as:
    • We recommend [purchasing/selling] the stock because [discuss your unique view of the critical factor]…
    • This event, which is a key catalyst to our thesis, is [positive/negative] (quantify earnings per share and cash flow impact if possible) because…
    What not to say:
    • We recently attended an industry trade show where we saw a number of products that were interesting, but not likely to have any impact on the companies we follow…
    Easy to Consume:
    Make it easy for others to consume
  • Quickly convey the key elements above (Aware, Differentiated, Validated and Conclusion-oriented)
  • Quantify insights whenever possible to avoid making the consumers of your message find or compute the information on their own
  • To draw in your reader, include supportive anecdotes and stories that are representative of the research you are conveying
  • Be concise:
    • Avoid redundancy by creating an outline for reports and presentations
    • Revise first drafts of reports and presentations to make them shorter
    • Don’t explain everything you’ve researched or include immaterial/extraneous material
    • Don’t overwhelm with too much raw data
  • Avoid too much jargon and acronyms by communicating in a manner that a generalist PM will understand
  • Checklist to Ensure You Are Concise:
    • If I had to send this as a short text message or tweet, what could be cut and still convey my message?
    • Is a topic covered more than once?
    • Are there non-critical portions that can be specifically referenced in prior or other research available elsewhere?

    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

    AnalystSolutions QRC, Information Sources Pros and Cons v2.7P

    Sign Up for Our Reference Card of the Month Club

    We will send you a reference card each month, highlighting a key best practice critical to success

    Let us know your interests

    AnalystSolutions respects your privacy and will never share your information with others. You can remove yourself from any distribution with one click.

    Assessment and Book Samples:
    Workshop Free Previews:

    You have Successfully Subscribed!

    Let us know your interests

    AnalystSolutions respects your privacy and will never share your information with others. You can remove yourself from any distribution with one click.

    Assessment and Book Samples:
    Workshop Free Previews:

    You have Successfully Subscribed!

    Evalulate our tools for free

    We offer free full versions of our content for evaluation purposes (valued at over $700) to professionals holding the following roles: 

    • Manager of buy-side or sell-side analysts (DOR or PM)
    • CFA Society leader responsible for programming
    • Professor teaching students pursuing careers in equity research

    You will receive:

    1. Free GAMMA PI™ assessment
    2. Free access to our presentation "Are You a Great Analyst?"
    3. Free full workshop (not "Preview" version), including all materials (Learner Workbook, Slides and Quick Reference Cards)
    4. Sample chapter of Best Practices for Equity Research Analysts

    To ensure a quick verification of your role above (usually within one business day), please provide the email address issued by your organization.


    You have Successfully Subscribed!

    Try 2 of the 15 GAMMA PI™ Modules for Free

    You will be directed to the FREE SAMPLE EDITION of our GAMMA PI™ Equity Research Analyst Self-Assessment.  Please provide a valid email address to receive  your results (your email address remains confidential within AnalystSolutions).

    You have Successfully Subscribed!