There is no better way to assess your passion and readiness for institutional equity investing than a stock write-up, so it's crucial to make sure you put out the best product when making a first impression in an interview or a networking email.
There is already an abundance of great literature on how to craft a good stock pitch. So I will discuss instead what I have seen candidates done wrong.
As always, there are exceptions to the rule and I welcome your feedback and thoughts. Comment box at the end of article.
- This is the most fixable situation. Fix run-on sentences, turn a giant paragraph into more mini-paragraphs, use less words to say the same thing. A good pitch needs to be to the point, with clear structure.
- Isolate the key drivers of future free cash flow generation ability of the business and get right to discussing your variant view on those drivers with support of qualitative and/or quantitative data.
- If you struggle with the wordsmithing, hire a professional editor / graphic designer to make the stock write-up more presentable, which matters a lot in a short interview or a networking email.
Pitching Marquee Names (such as FAANG)
- For the purpose of the interview, your goal is to convince your interviewer you have interesting (the key word here) stock idea.
- Alphabet might be actionable, but 99% of the time you will not get a job by pitching Alphabet because almost every fund has done work on or own Alphabet. If funds cannot raise capital by just owning FAANG, you will not get a job by pitching them.
- It’s tragic, because you could do very well financially by just owning the high quality mega caps like FAANG, but investment management is also a business, and owning FANG is not a differentiated business strategy and hence no one will invest in your fund.
- Likewise, you can enhance your candidacy by presenting a slightly lesser known but equally actionable stock.
Pitching Mega Cap
- Along the same logic as pitching FAANG, mega caps - stocks with the largest market capitalization are generally very well-known names - might be perfectly fine as investments.
- The issues: First, they are well covered by Wall Street so it’s more difficult to develop variant view. Second, mega cap companies have multiple distinct business segments (think Microsoft has 5+ distinct segments with their own end markets and competitive dynamics), so it's time consuming and difficult to analyze five companies at once when you just started learning how to analyze companies.
- If an interviewer does not explicitly expect a pitch on a mega cap company, why fight the uphill battle? That’s why I like to stay in the small / mid cap because those companies tend to have one core product and one end market.
Pitching stocks owned by the fund
- Unless mandated by the interview process (ie. you are required to pitch an assigned stock or a stock within an assigned sector), do not pitch companies owned by the fund (or sold short by the fund). It’s highly unlikely that you will know more about a company that someone who risks big capital on it.
- It’s hard to know what a hedge fund is short because it is not reported. So if possible, just stay away from a sector that a fund has heavy allocation.
- If it’s a generalist fund, it’s still possible to find out the background of where the interviewer is from. Every investor has relative sector strength and weakness. Try to pitch names in sectors the interviewer is relatively weaker at.
- If your interviewer is a true generalist, there is really nothing you can do.
Good business at any price
- I have seen pitches where a candidate talks about how great a business is for 3 whole pages, but there was no discussion on valuation. And then I checked its valuation is at 40x sales and I understood why the omission.
- In my experience, this is more common with private equity candidates whose fundamental work is exceptional but struggle to adjust to price discipline in public market investing.
- Whether you are playing for relative valuation convergence under a shorter-term investing framework or absolute valuation as a long-term investor, make sure your thesis is underpinned by reasonable valuation as an entry point.
Not knowing your audience
Simple issue. Make sure:
- No technical analysis or macro idea to a fundamental shop
- No shorting stock pitch to long only
- No trading quarter thesis to a long-term shop
- No ultra-growth idea to a value fund (Doordash and Cheniere are not the same)
More tolerable but case dependent:
- Pitching international stock for a domestic fund
- Pitching a small cap stock to a large cap fund (I have gotten offers doing that)
Complex technology or situation
- There is no extra alpha in complexity. Funds that specialize in complexity are outliers. Just because Seth Klarman likes to play PG&E after California wildfire, doesn’t mean you have the expertise to come up with a variant view on a situation like PG&E.
- Same goes for complex technology companies. If you don’t have a biotech background, don’t pitch a biotech stock when neither you nor your audience understand the biology and chemistry behind these companies.
- Similarly, think twice about pitching complex software and semiconductor names because your interviewer might be lost or uninterested.
- Even if they are money-making ideas, you did not get the job because you failed to get the message across. Keep the pitch simple and understandable. The goal is to get the job.
- This is not a private equity or investment banking modeling test. Model the business only to the extent that helps you isolate key drivers and defend variant view.
- You don’t need to model the crap out of their pension liability if that does not drive your thesis. The key is to defend your assumptions.
- Not going into these. Basic things: not knowing the business very well, not understanding the industry and competition, not knowing the revenue, cost and free cash flow drivers, etc.
- Not having a model (yes, I have interviewed candidates who came in without a model)
If you are interested in learning more about professional equity investing (the "buy-side"), I have two other great articles for you:
Don't know where to start to research and value a company? Have trouble generating stock ideas and differentiating on stock pitch? I can help you. Let's meet!