Stock Pitch

Stock pitches are reports that analyse stocks believed to be mispriced – overvalued
or undervalued – in order to provide investment recommendations. One fundamental
section in a stock pitch is the investment thesis, which proposes a reason why a
stock might be mispriced and is then supported by evidence to further prove that the
thesis is right. Financial analysis is an important factor when it comes to stock
pitches, as it dictates how much exactly is a stock mispriced and supports the thesis
with financial evidence. Normally, advanced valuation methods are used, such as
comparable analysis or DCF, as well as other methods. However, since we believe
that at this stage, our analysts are not required to be technically proficient, and can
benefit much more by fundamental analysis, they would not need to go so far as to
conduct advanced financial analysis and determine in precise numbers and
percentages how is a stock affected. What makes stock pitches unique, is that it
requires more creativity and problem-solving skills, and the ability for analysts to
actually to think more thoroughly, it is also less dependent on rigorous research like
other M&A or equity research reports.
Teams will continue covering the stocks they had conduced Equity Research reports
on, as they had already familiarized themselves with these businesses, and the stocks
we delivered before experienced catalytic events, therefore, they are suitable
candidates for stock pitches reports. The following are the sections of a stock pitch
with a fictious example of company ABC, a residential property development
company which had witnessed an increase in the stock price, following the central
bank’s announcement that interest-rates will go down. The stock pitch proposes that
the sudden increase in the stock price is unjustified, as analysts had found out that
company ABC, has a large percentage of its portfolio in Location X, which is highly
exposed to the ramification of the pandemic.

Recommendation
The first section of a stock pitch is the recommendation, which should mention
whether a stock is to be longed or shorted, this small section is to be written by the
director. A recommendation is to be made according to the past equity research
report conducted, and if a team is analysing a stock for the first time, our
recommendation is for the director to make his research and conclude a decision to
lead the rest of the report. In this section, there is a brief mention of different factors
and sections which will be further analysed in the report. An example can be:
“We recommend shorting stock [ABC] (A residential-property development
company) which is believed to be overpriced after the trading price of the stock
increased significantly by 13% following the central bank’s announcement that
interest rates will go down. Although interest rates are normally an indication that
property development companies will improve their performance, we believe that
the nature of ABC’s property portfolio holdings, coupled with the ongoing
pandemic, are cardinal factors negatively affecting ABC’s performance even with
interest rates down.
A major catalyst in our investment thesis is that a significant portion of ABC’s
property portfolio is situated in an area that is believed will be negatively affected
with the pandemic, to an extent that can easily offset low interest-rates, since it is a
location associated of being highly dependent on tourists, whose number will go
down substantially, leading for a steep decrease in demand, which will lead for
property prices to go down as well.
Nevertheless, an investment risk could be that our assumption regarding how the
pandemic will affect tourism is inaccurate, and that despite the increasing cases,
authorities within the locations of ABC’s property portfolio can ease regulations
which might subsequently cause tourism to either not change or even increase.
Furthermore, there are other risks pertinent to the pandemic itself, and whether cases
themselves will keep on increasing, or decrease due to the vaccine rollout”.

Company Overview
Very similar to a company overview generally found in an equity research report,
with more focus on recent events pertinent to the investment thesis, rather than the
history of the company.
Very similar to the company overview done in an equity research report, with more
focus on recent events and how it had affected the company.

Investment Thesis
This section provides more information on the different views of the market, for
example, if there is an innovation that is believed to help the company in questions,
this section would elaborate more on the technical side with a wider explanation of
the situation, similarly, if regulations are believed to harm a company, a report
should explain how the company can be affected. The investment thesis section must
analyse both sides, while concluding and emphasising on the side supporting the
recommendation. An example for the last section can be as follows:
“Interest rates can effectively help companies involved in property investment and
development because of the effect interest rates have on supply-and-demand.
Interest rates are a method central banks use to affect different aspects of the
economy; a decrease in interest rates can “revive” the economy, as it allows investors
to borrow more capital and perform more effectively. For the property market, a
decrease in interest rates can help companies in two fundamental ways:
1) A decrease in interest rates means that companies’ significant expenditure
which comes from paying debt goes down substantially, which means that
corporations can perform more effectively and create more value for
shareholders.
2) Because of the decrease in interest rates, investors are more motivated to buy
properties, as investments are more likely to be justified and offering
attractive returns, as well as that capital availability also increases, this leads
for an increase in demand in the market, which will subsequently lead for the
prices of property to soar up, meaning that the portfolios of companies holding
property will increase in value.
Nonetheless, as have been demonstrated, interest rates are a macroeconomic mean
to stimulate markets, that can be offset by other microeconomic factors such as the
fundamentals of the company. 47% of ABC’s portfolio is located in City X, which
had been negatively affected with the pandemic, causing for average property prices
to go down by 15.6%, after the closing of airports due to the increasing number of
cases. The significant decrease in tourism can have several vital factors:
1) Properties that are used as service-accommodations for tourists such as the
ones found on AirBnB, can face foreclosure, therefore causing for supply in
the market to go up while prices to go down. Furthermore, with many
businesses highly dependant on tourists’ revenue, such as hotels in the
hospitality industry, it is highly likely that many will file for bankruptcy or
close-down, hence directly affecting commercial real-estate negatively with
an expectation for commercial property to also face foreclosure risks,
inevitably spreading the effect to residential property.
2) Foreclosures can also be caused because of the increasing unemployment rate
which will result in an increase in failures of payment by both landlords and
tenants.
 3) In the current conditions, uncertainty is inevitable, which means that although
access to debt financing has been eased, using capital from HNWI or
institutional investors is going to be more challenging, and add a risk premium
to the cost of capital

Catalyst
After explaining the two sides of the argument and emphasising on the evidence
supporting the investment thesis, the catalyst narrows it focus more on one major
factor which justifies the investment recommendation. In this section, a much more
detailed explanation has to be provided, with different sources of evidence
supporting the thesis. Using numbers can be great way of demonstrating the catalyst
thoroughly and accurately.
“The greatest determining factor that leads us to expect for the performance of the
stock to be affected negatively is that Location X is the most exposed area in the
country when it comes to the ramifications of the pandemic upon tourism, hence also
making it the location with biggest downside with the increasing number of cases.
Despite the vaccine rollout, we can see that Country X is still witnessing serious
complications caused by the pandemic. The continuously increasing number of cases
indicates that it is highly unexpected for Location X to get to its former economic
state, and will probably continue to be negatively affected by the pandemic,
subsequently stretching this effect to the property market which ABC operates in.
The following are different factors involving the ramifications of the pandemic that
further demonstrate the real effect on the market, and leads us to strongly believe
that despite the announcement of lower interest rates, ABC will still face greater
challenges which will offset the benefits coming from lower-interest rates:
- 67% of people living in Location X work in businesses that depend on
tourism, 45% of these had faced a negative change in their household income,
this is twice as much as the average effect in the rest of the country, palpably
affecting how Location X is more exposed to the negative ramifications of the
pandemic.
- With a significant percentage of properties operating as service-
accommodations, such as those found in AirBnB, 23% of total residential
properties found itself missing 80% of its usual monthly payment averages,
thus increasing the number of foreclosures in the residential property market.
 - It is reported that 1 out of 3 businesses in Location X, especially in markets
that are dependent on tourism, such as hospitality and restaurants, have closed
during the pandemic. This event had led for an increase in the foreclosures in
commercial property, which is interconnected to residential property as well.
- Despite the vaccine rollout, we can that cases are not only increasing, but are
also accelerating in numbers, with percentages of change increasing 10%
every week.
We believe that this evidence demonstrates the extent of the effects of the pandemic
on Location X, and how Location X is highly exposed to the ramifications of the
pandemic. Furthermore, evidence leads us to expect that the current condition is
going to be worsening in the future, with the increasing number of cases.

Financial Analysis
Basic overview of the financial reports the company has been producing, in order to
draw a conclusion that can support the investment thesis. Numbers and valuation
metrics are going to be used in order to conclude an opinion, and not to deduce
figures related to intrinsic value of company and how much is the price of the stock
is mispriced. Here are types of numbers and metrics to be used in order to support
the investment thesis.
- Income Statement: Revenue, operating income, EBITDA, etc...
- Valuation Metrics: EPS, P/E, P/S, etc...
- Margins: Profit Margin, Net Margin (margins can be an indication for how
the company is operating, for example, a margin that has been witnessing
increasing improvement can be attributed to having efficient management and
a healthy operation.
- New cases have been increasing by 17% week-on-week
- 1 out of 3 residents of the Location X works in an industry highly dependant
on tourism, leading for 67% of salaries being affected negatively
- In the last year, foreclosures in Location X was 45% higher than average cities
in the country, demonstrating the real effect of how tourism contributed in
negatively affecting it
We strongly believe these factors combined will significantly overweight the
positive effects that might have been caused by the low interest rate”
NOTE: This was a brief manifestation of a catalyst, the section should be much more
detailed with evidence and mention of other cases that can be connected to our
argument, with a thorough demonstration of how these factors help the investment
thesis argument.

Investment Risk Analysis

This section is similar to the risk analysis section found in an equity research report,
however, in a stock pitch report, the emphasis is on the investment itself, and how
the thesis could be inaccurate. For our example, the Investment Risk Analysis, would
target our assumption that Location X is highly exposed to the ramifications of the
pandemic. The investment risk would address possible events pertinent to that the
vaccine rollout might come into effect later, that predicting how the pandemic will
go can be difficult especially in the long-term, or that even despite the increasing
number of cases, regulations will still be eased, which is happening in other location
around the world.