Effective Equity Research Report Writing

Analyst’s write reports to convey their opinions of a particular security, industry or economy to various groups. These groups include: the investment committee, portfolio managers, retail and institutional clients or even the investment firm they work in.

After some personal research, I came up with a guideline to effective equity research writing; I am going to share it with you guys briefly. Before we begin, let us analyze the purpose of a research report and what users seek to derive from it. It is undeniable that the main purpose a research report is to convey investment recommendations to investors in order to guide them on their investment decisions. In order to do this, the reader would look for persuasive supporting arguments.

A key supporting element that would back up the recommendation of the analyst is the valuation of the security. In valuation, the analyst has to show competency in some key areas; like understanding the business, industry analysis, and company analysis.

Research Reports

Research reports can be broken down into 3 areas, which are :
1) Description: Here there is a little background information of the company, information of the company’s sales, earnings, new products and macroeconomic and industry contexts in which the company operates.

2) Analysis and forecasts of the industry and company.

3) Valuation and recommendation

For a research report to be effective, it must contain the following features or characteristics
1) It should contain timely information: This means that information conveyed in the research report should be recent and not outdated; because of how sensitive the financial market Is to swift finance & economic news , timely information contained therein in a research report, may be the difference between a good and bad investment.

2) It must be written in clear, incisive language. A research report should not be ambiguous; it should be intelligently analytical and clear.

3) It should be unbiased and well researched: A research report should take in key factors that might affect the future prospects of a security. Thorough research should be undergone so as not to mislead investors. Also a research report should be objective and free from bias.

4) It should be consistent: A research report should be consistent; analysis, forecasts, valuations and recommendations should be internally consistent and not conflicting.

5) A research report should be sufficient to enable the user analyze on his own the security based on your recommendation and then make his decision.

6) The research report should inform the user of risk factors present in the company. The investor needs to know what he his getting into when he invests in a security; because risk is inherent in almost every type of security, investors should therefore be informed of the level of risk. For example if stocks perform badly in an economic recession, the investor may lose part or all of his investments.

7) The analyst should disclose any potential conflict of interest faced by him. When making a recommendation or a security, analysts should not be deceived by good prospects and ultimately recommend as good investments with little or no valuation; this is because expected alpha on a common stock purchase depends on the price paid for the stock, whatever the business prospects of the issuing company.

Sections of a research report

1) Table of contents: This is usually for long comprehensive research reports , it shows schedule of things to be included in the report.

2) Summary and investment conclusion: It shows the large picture of the company, with details on current position of the company, major developments in the company , earnings projections and other major conclusions.  Here, the investment action to be taken is also discussed.

3) Business Summary: In the business summary, industry analysis and competitive analysis are undertaken; this is followed by an historical performance of the company and finally the financial forecasts. In the industry analysis, the analyst looks at the outlook of the industry the firm operates in, major changes occurring in the industry, the current stage in the life cycle, the products in the industry, the buyers, regulatory environment and comparisons with comparable companies within the industry.

Competitive analysis is critical for any marketing plan; it can be used to establish what makes the company’s products or services unique, compared to your competitors. In a competitive analysis, you could evaluate competitors by placing them in strategic groups, and discern factors that might affect your range of products compared to their; such factors include

• Their current products or services
• Their market share
• Growth patterns or the current stage in the product life cycle
• If your products or competitors’ products are very successful, or in the growth stage, how easily imitable it is?
• Your competitor’s marketing objective and assumption;  including their current and past strategies
• Strengths and weaknesses ; and the size of their business.

Analysis of the historical performance is basically a trend analysis of the company itself. We compare the company’s current financial performance with the past to test a company’s ability to create value over time; here we analyze trends in operating and financial metrics.

The next step in the business summary is to predict the future performance of the company by making financial forecasts.

4) Risks: The analyst needs to inform investors about the risk of investors in the security. He analyses positive negative industry developments, possible negative regulatory and legal developments, possible negative company developments and risks in the analyst’s forecast including after risk factors.

5) Valuation: Valuation is a technique used by the analyst to estimate the worth of the security. When giving details about the valuation used, the analyst should be clear in he description of model used, recapitalization of inputs and statement of conclusion.

Recommended Readings

Benjamin Graham., David Dodd., and Warren Buffet., Security Analysis: Sixth Edition, Foreword by Warren Buffett.

Joshua Rosebaum., Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions.

Micheal Shearn., The Investment Checklist: The Art of In-Depth Research.