How to Write an Equity Research Report - Part 1

There is a tremendous amount of information floating around about the different forms of valuation with vast amounts of detail about how to get it done. What seems to be lacking however, are instructions about how to present it all, once your analysis is complete. In this post, I will describe the basic requirements of a research report and then discuss aspects of the write up.

So, what should a research report contain? I believe it needs four main sections:
1. A Recommendation/Summary
2. An earnings forecast
3. The Valuation
4. A discussion of the valuation (i.e. the detail).

What's most important about these sections is the order - conclusion first then detail. Why you ask? It all has to do with the subjective nature of the analysis. When you conduct a valuation analysis, the price that you derive is a precise point estimate based on a large bedrock of assumptions. Two people, can value a company with 'reasonable' assumptions and end up with significantly different values. Which is correct? Well it all has to do with the story (i.e. the discussion) and which is most convincing (stepping away from our biases for the moment. Research report writing is about persuasion, not fact reporting, so just as you would in a debate focus on aspects of a case that support your argument, so you would in an equity research report.

Equity Research Reports: They're Not All the Same

There are several types of equities research reports. The two main types are sell-side and buy-side. Those that are found typically in circulation are the sell-side reports and they are normally produced by investment banks (typically) for their customers to guide their investment decisions. The buy-side are produced for the bank itself (therefore are internal), and are guided by differing perspectives and motivations.  Within the buy/sell group, there are standard reports, initiating reports, and notes (which are typically short-run updates, and usually just quantitative in nature). The initiating reports are conducted on firms that the bank has begun following and are typically more comprehensive in nature. After a initiating report is produced standard reports will follow for as long as the analyst (or his/her peers) continue to track the stock. Stocks that are tracked are normally part of an index like the ASX300, or are amongst the top stocks in an industry because these are the stocks that investors care about and are constantly trading. Remember that for analysts (the sell-side), this is a selling game - they are trying to convince you to buy /sell or hold. Those decisions determine aggregate trading activity which to some degree is how the analyst will be assessed.

Style versus substance 

First impressions are key. If you haven't captured the imagination of the reader in the first 10 seconds of scanning through your document then you can forget about them reading it at all. In their brilliant book Life's a Pitch (by Stephen Bayley and Roger Mavity - a must read for all graduating students), the authors have a section titled "It's theatre, not information", where they write "So when you're pitching to someone, your asking them to judge the future. Since knowing the future is beyond logic, their judgement won't be based on logical factors but emotional factors: trust, confidence, hope, ambition, desire." An investor doesn't know whether the company will succeed but they usually know they want to invest and they aren't going to base in on your excel or your pretty graphs. Your argument needs to be emotive and with that in mind you can sprinkle it with some information. A catchy title, sleek formatting, short-paragraphs and persuasive sentences are key to a good report. In regards to that last point, don't use the passive voice. Take for example the line:

It is expected that sales will grow at 5% in the forthcoming year. 

Great piece of information but a real stinker when it comes to persuasion.

A better way to present that statement would be to say:

I project that sales will be 5% higher in the forthcoming year OR even Projected Sales will be 5% higher next year. 

The alternative statement is hard-hitting. Short and sweet and said with a great degree of conviction and confidence. This shows that you know what you are talking about and are prepared to stand by and defend your numbers. There are several other issues of style that warrant discussion but to avoid a long and drawn out post, here is what you should remember:


1) Say things with conviction by making your statements personal (avoid 2nd/3rd person statements).
2) Make sure your tone reflects the recommendation. If its a buy - then make sure you are positive about your statements. There is nothing worse than a buy recommendation that is down-beat on the company.
3) Don't waffle. If you get tempted - go start on your blog!

More on this to follow....