The Advanced Guide to Equity Research Report Writing

by Avadhut Nigudkar

in Equity Research Career

10

Contents [hide]

 1 Why I Wrote This Guide

 2 Who Is This Guide for?

 3 How Much of This Guide Should You Read?

 4 Chapter 1. What Is an Equity Research Report

 4.1 a. Different types of equity reports

 4.1.1 i. Sell-Side reports

 4.1.2 ii. Buy-Side reports

 4.1.3 iii. Initiating coverage reports

 4.1.4 iv. Standard reports

 4.1.5 v. Issue reports

 4.1.6 vi. Investor notes

 4.1.7 vii. Sector reports

 4.2 b. Contents of an equity research report

 4.3 c. Importance of Disclaimers in equity research report

 5 Key Takeaways

 6 Now You Try It

Why I Wrote This Guide

Equity Research is a rewarding career.

To keep up, you need a strong foundation with the judgment to think critically, act independently, and be
relentlessly analytical.
That’s why I wrote this guide — to empower you with the equity research report writing skills to stay
ahead in equity research career.

There is almost NO guide available that teaches you how to write equity research report. From textbooks to
online video tutorials, you can check and let me know if you find one.

And, I felt that I should write a detailed and step-by-step guide— a guide that really starts at the beginning
to equip already-intelligent analysts with a healthy balance of conceptual and practical advice.

The Advanced Guide to Equity Research Report Writing takes your writing to the next level.

Who Is This Guide for?

I wrote this guide for an audience of equity research analysts, investment banking professionals, industry
analysts, market research professionals, business management students, and freelance writers.

Most of all, I want you to walk away from this guide feeling confident about your equity report writing
skill.

How Much of This Guide Should You Read?

This guide is designed for you to read from the beginning to the end.
Each new chapter builds upon the previous one.
A core idea that I want to reinforce is that you need to know the framework to write the reports.
Reading this guide from start to finish will help you connect the many moving parts of report writing to
your big-picture goal, which is equity research report writing skill.

Chapter 1. What Is an Equity Research Report

This chapter explains what exactly an equity research report is.

The questions like—Who makes it? Who reads and uses it? What are the different types of equity research
reports?—are answered clearly and elaborately.

It briefly talks about the various key contents of an equity research report.

And lastly it explains the need to provide a disclaimer at the end of an equity research report.

So before understanding how to write an equity research report, let’s try to understand what exactly an
equity research report is.

FINRA, the Financial Industry Regulatory Authority, defines an equity research report, in Rule 2711 (a)(8)
as,
 “A written or electronic communication that includes an analysis of equity securities of individual
companies or industries, and that provides information reasonably sufficient upon which to base an
investment decision.”

Readers of Equity Research, more so than anything else, identify trends that make investment decisions
easier to justify.

In simpler words, an equity research is a document written and published by a brokerage house or
securities firm for its clients to help them to take better decisions regarding which stocks to choose for
profitable investment.

The report should be such that it should convince the client to take a decision.

The report should be crisp; the point of view should be clearly structured and articulated concisely.

In the investment industry, equity reports usually refer to ‘sell side’ research, or investment research
created by brokerage houses.

Such research is circulated to the corporate and retail clients of the brokerage house that publishes it.

Research produced by the ‘buy side’, which includes mutual funds, pension funds and portfolio managers,
is usually for internal use and is not distributed to outside parties.

a. Different types of equity reports

In the above paragraph we saw terms such as ‘sell-side’ and ‘buy-side’.

Let’s quickly understand what these terms mean:

There are two main types of equity research reports:

i. Sell-Side reports

Sell-side reports are the most common type of equity research reports in circulation.

They are normally produced by investment banks, typically for their clients to guide their investment
decisions.

A sell-side analyst works for a brokerage firm or bank which manages individual clients and makes
investment recommendations to them.

Sell-side analysts issue the often-heard recommendations of “buy”, “hold”, “neutral”, or “sell”.
These recommendations help clients take decisions to buy or sell stocks.

This is favorable for the brokerage firm as each time a client takes a decision to trade; the brokerage firm
gets a commission on the transactions.

Click here to see some examples of sell-side reports

ii. Buy-Side reports

The ‘buy side’ reports are internal reports, produced for the bank itself, and are guided by differing
perspectives and motivations.

A buy-side analyst generally works for a mutual fund or a pension fund company.

They perform research and make recommendations to the money managers of the fund that hires them.

Buy-side analysts will verify how promising an investment seems and how well it fits with the fund’s
investment strategy. These recommendations are made exclusively for the benefit of the fund that employs
them and are not available to anyone outside the fund.

Within the buy/sell group, there are other types of reports like initiating coverage reports, standard reports,
Issue reports, Investor notes and sector reports.

iii. Initiating coverage reports

The initiating coverage reports are conducted on firms that the bank has begun following and are typically
more comprehensive in nature.

Initiating coverage reports analyze a company’s historical financial information, order books, efficiency,
SWOT, cash-flows and future earning potential, basis which it estimates the future earnings of the
company and its P/E multiples.

Click here to see some examples of initiating coverage reports

iv. Standard reports

After an initiating report is produced standard reports will follow for as long as the brokerage house
continues to track the stock.

Stocks that are tracked are typically part of an index like the SENSEX, or are amongst the top stocks in an
industry as these are the stocks that investors care about and are traded in larger volumes.

v. Issue reports
These reports are issued when generally companies announce earnings each quarter (Quarterly earnings
reports).

vi. Investor notes

These reports are published a few times in between for incremental information and news.

For example – an investor conference companies hold, a big M&A deal, or a major new product
announcement from a competitor.

These are usually short-run updates and are typically just quantitative in nature.

vii. Sector reports

A sector report is a document which evaluates a given industry and the companies involved in it.

It is often included as part of a business plan, and typically seeks to establish how one company can gain an
advantage in an industry through detailed research on competition, products and customers.

Click here to see the sector report

b. Contents of an equity research report

Now that we have understood the different types of equity research reports, let’s try to see the contents of
an equity research report.

An equity research report should not be more than 10 to 15 pages long and should be very crisp and
concise.

It should give the reader a clear understanding of the opinion of the analyst writing the report.

An equity research report typically has the following contents:

1. Analyst opinion and summary

2. Key highlights of the company

3. A snap shot of the industry

4. Financial ratio analysis

5. Valuation analysis
6. Risk factors

7. Disclosure and rationale of rating

Usually most of the equity research reports have this information; however there is no hard and fast rule in
which an equity research report should be written.

We will study in detail (with examples) how to write each of these segments of an equity research report in
the forthcoming chapters.

c. Importance of Disclaimers in equity research report

As every equity research report is an investment document, and investors use it to take decisions for buying
or selling securities based on it, it is important for the report to have certain disclaimers to show un-
biasness of the analyst writing the report.

Some typical disclaimers are as follows:

· Every equity research report entirely reflects views and personal opinions of the analyst as on the date of
publication

· The analyst does not have interest in the shares of the company

· Compensation of the analyst is not linked directly to any specific research recommendations contained in
the report
Click here to see an example of disclaimers

Key Takeaways

 Equity research report writing is a skill. You need to build this skill to go to the next level in your
career. Top notch careers in finance–equity research, investment banking, asset management,
financial research, Knowledge Process Outsourcing (KPO) units value this skill in high regard.

 There are different types of research reports–sell-side, buy-side, initiating coverage, standard, issue,
investor notes, and sector reports. As an analyst, you should know all these reports.

 Contents of an equity research report include Analyst opinion and summary, Key highlights of the
company, A snap shot of the industry,Financial and ratio analysis, Valuation analysis, Risk factors,
and Disclosure and rationale of rating. I’m going to cover all these sections in detail with examples
in coming chapters.

Now You Try It

I hope you can see the potential of equity research report writing skill for your career.

Yes, it takes hard work to create something great.

But with this skill you already know ahead of time that your hard work is going to pay off.

I want you to give the skill a try and let me know how it works for you.

How to Write Stock Analyst Ratings, Recommendations and Summary

by Avadhut Nigudkar

in Equity Research Career

In chapter 2, you learned about How to write an Equity Research Report and some important things to
remember while writing equity research report.

Already, you’re ahead of the majority of analysts who want to write equity research reports.

But now that you know what is an equity research report and how to write it, you need to be able to write
much better equity research report.

Contents [hide]

 1 Chapter 3: Analyst Opinion and Summary

  2 a. An opinion or a Clear Investment Idea

 3 b. Target Price

 3.1 1. Fundamental valuation

 3.2 2. Relative valuation

 4 c. A Catchy Headline

 5 d. A Summary of the Investment Case

 6 e. Key Data about the Company

 7 Key Takeaways

 8 Now You Try It

Chapter 3: Analyst Opinion and Summary

In this chapter, I will cover what information to include in the summary page like stock analyst
ratings and recommendation (outperform, hold, overweight, etc.) target price, a financial snapshot,
company overview and performance bullet points in the coverage period. I will also talk about the
importance of having a catchy headline to start the report with.

The first thing that you have to understand when you start writing the equity report is that you need to give
a crisp and clear beginning.

Remember – Well begun is half done!

Beginning a report well makes it easier to do the rest.

Once you have begun a report well, you do not need to put in much more effort to finish it.

It also gives the reader a clear perspective as to what to expect through the report.

Designing the structure first will save you time and improve the quality of the report. So please make sure
you put a lot of thought as to how you want to structure your first page.

If the reader doesn’t find the first page interesting, there is a big possibility he/she might not go past it.

Remember this part is like the starter to your main course. It should make the reader want more.

The first page of your report should be like a snapshot or summary of the whole report.

The first page should definitely contain the following parts:

 1. An opinion or a clear investment idea

2. A target price

3. A catchy headline

4. A summary of the investment case

5. Key data about the company

I have tried to show the placements of these key elements on the first page of a specimen equity research
report which will help you structure your own report.

This report was made by Avendus on Cipla in August 2013. I’ll look at each of these elements and see how
to structure these in the report.

Now, if you look at the above example, you’ll see that every element is clearly demarked. Each element is
unambiguous and is making a point to the reader.
When you start writing this section, try to use the SPQR technique. SPQR stands for

Situation What does the reader know?

Problem What has changed?

Question What would the reader ask you as a result?

Response Your message

If you ask these questions to yourself before starting on this section, you’ll be able to write a very relevant
and useful report.

You will be able to clearly decide how to structure and compose the above element of the first page.

Let’s look at each element and see how to address them.

a. An opinion or a Clear Investment Idea

An opinion is the most important element of an equity research report.

The reader wants to understand what the analyst thinks about the company.

Just providing ratio analysis or by providing latest news related to the company is not enough.

The readers need a direction or advice as to the attractiveness of the company stock.

So, make sure you are clear on what you think about the company and provide your advice clearly. It could
be ‘Buy’, ‘Sell’ or ‘Hold’.

While deciding on your opinion, make sure you use the deductive as well as the inductive techniques.

Inductive reasoning is reasoning in which the premises seek to supply strong evidence for (not absolute
proof of) the truth of the conclusion. Below is an example as to how you can use the inductive reasoning
technique to decide your opinion on the stock.
While the conclusion of a deductive argument is supposed to be certain, the truth of an inductive
argument is supposed to be probable, based upon the evidence given. Below is an example as to how you
can use the deductive reasoning technique to decide your opinion on the stock.

b. Target Price

The price target is the price an analyst believes the stock will achieve during their investment time horizon,
which for most firms is 6-12 months.

While price targets are useful, most investors find more value in an analyst’s conviction level or in the ratio
of upside to downside.

For example, if you were a sell-side analyst, you would seldom have one stock with 10% upside to its price
target that you were more favorable to than a stock with a price target 15% above the current price. The
rationale is that you have more conviction in the 10% upside stock.
So how is target price of a company, calculated in equity research reports?

Target price is based on the valuation of the company.

Valuation actually means how much is this asset worth?

Valuations can be done in many ways but primarily can be categorized as:

1. Fundamental valuation

The comprehensive and market agnostic valuation.

Fundamental valuation is driven more by intrinsic valuation making financial projections.

2. Relative valuation

Quick way to estimate today’s value.

Relative valuation is not getting into financial projections but comparing valuations of assets relative to
each other.

There is a big assumption underlying this methodology, that market is correctly valuing the assets.

Read more on relative valuation.

Make sure you provide your target price upfront and also provide a rationale to it.

c. A Catchy Headline

It is very important to give a catchy head line to your report.

Most of the times this is the first thing that an investor might read when he starts to read the report.

Make sure that this headline is catchy but at the same time relevant.

It should basically be the hypothesis to your recommendation. It should be in sync with your investment
rationale.

Below are some examples of catchy headlines:

If you see the above examples, it is clear what the analyst wants to say about the performance of stock in
one single sentence.

Likewise, always take a moment to think about what is the central theme or the key trigger that you want
to share with your readers.
d. A Summary of the Investment Case

It is always a good idea to provide a brief summary of your investment rationale.

Just below your headline, always give in brief an explanation as to why you have recommended a certain
action for the stock.

See the below example:

Here the analyst has clearly explained the logic as to why he has recommended the price of INR 450.

He has explained that even though the market environment had been tough, Cipla’s domestic sales have
been growing. He has also provided other rationale which supports his recommendation.

Whenever you write an equity report, remember that you have to always provide intelligence that will
support your recommendation or hypothesis (Read Chapter-2 for this).
When you write this particular part, make sure you cover all the key drivers or challenges that the company
faces and also write a line or two about the industry in which the company functions.

Also write about the latest financial performance and the expected growth of the company in brief.

Here is another example of a summary of an investment case. Here the analyst has gone into greater detail
to explain his investment rationale in the below summary.

He has also written about elements such as key investment areas for the company, risks that the company
faces, a brief on the valuation and also a quick snapshot of the Pharma industry in India.
The key to this section is to be brief but at the same time provide enough intelligence which backs your
recommendation.

e. Key Data about the Company

Always provide a brief on the key market and financial data of the company on the first page itself. This
way the reader can quickly scan the data without having to go through the entire report.
Here you can provide information such as the company’s code on various data basis such as Bloomberg,
Reuters, etc.

You can provide information on the company’s performance on the stock exchange including data like the
average volume traded or average value of the stock in the time frame studied.

In this example the analyst has provided this information for the last 3 months.

You can get this information by looking at websites of stock exchanges like the BSE or NSE or even on
financial portals like Bloomberg and Reuters.

Websites such as Yahoo Finance and Google Finance also give this information.

You can also provide data on the shareholding pattern of the company. This information is easily available
in the company’s reported financial statements or on its website.
Here the analyst has provided a chart which compares the share price movement of the stock compared to
the SENSEX.

You can also provide a comparison of share price movement with key competitors which will give the
reader a quick perspective of the share price movement.

Again this information can easily be got from stock exchange websites or financial portals.

Further you can provide a quick snapshot of the financial performance of the company with past
performance as well as future expected performance.

Make sure you include key ratios such as PE ratio (Price Earning), ROCE (Return on Capital Employed)
and ROE (Return on Equity) which will give a clear picture to the investor who is reading the report.

You can calculate these numbers yourself or get them from financial portals which publish these numbers.

Again to reiterate, make sure the information you provide on the first page is crisp, clear and backs your
recommendation and investment rationale.

Key Takeaways

 Your report’s first page should include catchy headline, investment rationale, analyst rating/
recommendation, and financial snapshot

 Use deductive and inductive reasoning method to give clear investment idea

 Calculate your target price using fundamental and relative valuation.