Ensure Your Research Message Has Substance and Style
If forced to make this choice when buying a new car, would you prefer one with excellent performance and handling (engineering) that looks plain on the outside or one with just average performance and handling that looks stylish and high-end on the outside? This is the age-old dilemma of substance vs. style, which equity research analysts face when communicating their research.
Unfortunately, it’s not all or none, but a good blend of both. In the image below, I’ve put substance along the bottom axis (discussed in more detail in my ENTER™ framework) and style along the left axis (discussed in my ADViCE™ framework) to illustrate the four possible outcomes when communicating stock research.
Whenever communicating your stock ideas, verbally or in writing, your reputation moves up or down in the eyes of others…it rarely remains constant
Clearly we want to be in the upper right which helps to build the analyst’s reputation, but unfortunately, too often it falls into one of the other quadrants. If you’re curious to know where you stand, take a look at your last few messages and ask if they meet the ENTER™ and ADViCE™ criteria.
Four Possible Outcomes When Communicating Stock Research
Beyond the details found in these two frameworks, there are a number of practical tips that can help an analyst improve the style of their communications, which I’ve provided in the table below.
Stylistic Considerations for Communications
|Speak in the active voice rather than passive, and be specific when possible||Passive: “Expectations are not likely to be met this quarter.” Active: “We don’t expect the company to meet our $0.40 EPS for the quarter.”||It strengthens your message, and shows you’ve done the work|
|Don’t pretend to have a level of precision that doesn’t exist||“We expect XYZ to earn $7.03 in 2013 by achieving operating margins of 8.37%”||It conveys the image you rely too much on your financial model output, without thinking through the big picture|
|Avoid media-based words or phrases that appear sensationalistic||“The stock is poised for a break-out due to a revolutionary new product” or “This never-before- seen turnaround by management makes this stock a screaming buy”||It will send a signal to the consumer of your message that you’re inexperienced, which may cause them to question your judgment and the quality of your work|
|If you’re referencing management’s view, always include your view first||“We expect the company’s margins to reach 10% next year, which compares to management’s guidance of 9.5%||It shows you’re a thought leader by highlighting how management’s views compare with yours|
|When referring to your view, try to use words that convey research has been done, rather than just conjecture:||“We forecast the company’s earnings to grow 10% next year” is more confident than “We think the company’s earnings will grow 10% next year.”||“Think” is used for informal situations more than the others. You might say, “I think I’ll go out with friends tonight.” But you wouldn’t say, “I forecast I’ll go out with friends tonight.”|
|Unless it runs counter to your firm’s style, refer to yourself in your work as “we” and “our” rather than “I” or “my”||“We believe the stock is overvalued, because our work suggests consensus EPS is 10% too high next year”||It sounds humbler. You likely haven’t arrived at the conclusion solely on your own. At a minimum, you’ve had training from others to understand how to conduct your job.|
|Refer to companies and management as “it”, rather than “they”||“Management held its quarterly call where it debuted its new outlook”||This is an industry standard|
|Use bullets or a table where there are multiple numbers in a paragraph||Create a table such as the one below instead of “We are raising our 2017 EPS forecast for NDT from $1.00 to $1.20 which compares to consensus at $1.00 and raising our 2018 estimate from $1.15 to $1.30 which compares to consensus of $1.12.”||Easier for others to understand|
|Year||Former Estimate||New Estimate||Current Consensus|
When creating an equity research message (presentation, report, email, etc.), hopefully you’ll never need to choose substance vs. style because you’ll ensure you have both. Using my two frameworks and the table above should help you in this effort.
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 in this area, 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.
©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