Making a Strong First Impression: Writing Effective Equity Research Notes

Sell-side equity research is an uber-competitive space across major equity markets. For instance, an Indian IT major like Infosys is covered by over 35 equity research analysts, including Wall Street firms and Indian sell-side brokers. All of them provide asset managers with their freely distributed research reports. Imagine that a portfolio manager’s inbox is flooded with over 35 research reports of the same company – Infosys! Which report will the portfolio manager choose to read? Often this becomes a matter of not just which analyst is insightful, but also who writes well. This is where Aranca helps sell-side analysts refine and improve equity research reports to make a good impression in the few minutes that a portfolio manager or his/her buy-side analyst can spare to take a glance.

Typically, analysts covering a stock / sector write on a wide variety of updates, including:

  • Company / sector initiations : These are long reports with up to 15-20 pages per company.
  • News with short-term impact : These are templatized reports, usually company announcements, earnings updates, etc. spanning a few pages.
  • Events with long-term outlook : These include government regulations, M&As, etc and could be of varied length.

Commonalities in sell-side reports (key things that should catch the reader’s eye):

  • Ratings (Buy, Sell, Hold) or sector stance (typically in large font to set the tone)
  • Investment summary and justification (based on news, company updates)
  • Financial summary and market / competition trends (helps in valuations)
  • Environment, Social, and Governance (ESG) reporting (a recent trend)

Every equity research report is looked at as a vehicle for new or incremental value addition. Accordingly, the report needs to reflect:

  • What’s new for the stock (announcements, results, reported incidents)
  • An impact assessment (will the stock price rise / drop, and in what time frame)
  • State or reiterate financially justified recommendation (Buy, Sell, Hold)

How can sell-side analysts/research houses stand out among the crowd?

Place yourself in the shoes of your reader

Sell side analysts typically pride themselves on the depth of information and analysis on a particular stock, and rightly so, considering the time spent on research. However, the ‘market-moving’ aspects worth highlighting in any report are few. Hence, being precise would be a good start. It helps save an investor’s time while screening for relevant matter between the lines. This concept not only applies to ‘what’ to write, but also ‘how’ to write.

Consider the following examples:

  • The consensus significantly cut its 2018-20E EPS forecasts for ICT.
  • The stock is trading at 8x EV/EBITDA for 2018E, 1SD below the historical mean of 10x.
  • We think the company could record net profit growth of 48% in the next 2 years.

Notice all the red flags? These won’t tell the whole story if the investor has only minutes to skim through a report. Better versions could be:

  • The consensus significantly cut its 2018-20E EPS forecasts for ICT on June 3, 2018.
  • The stock is trading at 8x EV/EBITDA for 2018E, 1SD below the past 3-year mean of 10x.
  • We think the company will record net profit growth of 48% YoY in both 2018E and 2019E.

Look for more tips, including Things to Avoid in Equity Research Reports, in the next issue.