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In this tutorial, you’ll learn the structure of a stock pitch and how to find ideas and screen companies at the last minute – and how to complete the research and valuation process and find an “angle” for the company you pick.
Table of Contents:
1:30: Stock Pitch Structure
4:45: Idea Generation
14:34: Research and Valuation Process
18:05: Recap and Summary
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Stock Pitch Structure
Part 1 – Recommendation
Part 2 – Company Background
Part 3 – Investment Thesis
Part 4 – Catalysts
Part 5 – Valuation
Part 6 – Risk Factors and Mitigants
Idea Generation
Step 1: Figure out what strategy the firm you’re interviewing with uses, and which industries it likes and does not like.
Step 2: Pick an industry matching the firm’s strategy/industry or one that you know about.
On Finviz, we’ll screen for companies using “Industrial Goods” for the sector and “Industrial Equipment” for the industry, which gives us 12 companies.
Step 3: To screen this set, look for mid-sized companies in the industry – ideally ones in the $1 – 10 billion market cap range for U.S.-based picks (or, by revenue, hundreds of millions to low billions).
And look for companies where there’s been a clear divergence from the overall stock-price trends in the market over the past few months or year.
Barnes Group [B] and Standex Group [SXI] are the best candidates here, and we’ll add TriMas [TRS] as well.
Steps 4 and 5: Narrow this set further based on key drivers, pure-play businesses, and clean/simple financial statements. You want companies with 3-4 main drivers and perhaps 2-3 main business lines.
The financial statements aren’t that different, but Standex appears to have more segments than the others, which will make the research and valuation process take more time.
So, we’d narrow this to Barnes Group [B] and TriMas [TRS].
Step 6: Favor companies with clear catalysts in the next 6-12 months, such as an acquisition or divestiture, major product launch, expansion, strategic change, etc.
TriMas appear to have one in the form of an announced acquisition, but it’s quite small – only $12 million annual revenue vs. net sales of almost $900 million for TriMas!
As a result, and given the lack of other strong catalysts, Barnes Group is probably a better candidate.
The company does have some recent product/business launches and growth areas like “Automation,” and its business has shifted considerably in the past few years.
We could also argue the company has been unfairly penalized for its exposure to Aerospace (~34%) and, therefore, Boeing… despite not focusing that much on the grounded 737 MAX.
Research/Valuation Process
You need to complete four main steps here:
1. Research the Company and Industry: Find annual/interim reports, the latest investor presentation, and recent press releases.
2. Build a Simple DCF-Based Valuation: Project revenue and expenses in some detail, such as Units Sold * Average Selling Price, or Market Share * Market Size… perhaps 100-300 rows in Excel.
3. Public Comps: Find and use them, but use Finviz or Google Finance to save time (see our Comparable Company Analysis tutorial).
4. Do Real-Life Research: Speak with people in real life for a few hours – find suppliers, customers, etc. on LinkedIn and email them. Offer to share your views on the company or market as an investor in exchange for their thoughts on a few operational questions you have.
For the real-life research, General Electric, Rolls-Royce, and United Tech seem to be important customers… so we’d start there and look for possible contacts on LinkedIn.
Our angle here would probably be something to do with the market over-penalizing the Barnes Group due to its Boeing exposure; under-estimating its Automation segment; and possibly underestimating its margin expansion potential.
Or, we might take the opposite view and say that it should fall even more than it already has… it just depends on the results of the process!
Possible catalysts might include backlog updates, announcements related to Boeing, earnings announcements with “Automation” results, acquisitions, and more.
We didn’t actually complete a valuation/DCF for this example, but if we had more than 30 minutes, we might have done that as well.
