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Examples & Comprehensive Writing Guide (Update 2021)
A stock pitch is where you present an investment idea through reason and logic, and it is a requirement for all buy-side job interviews. Every great stock pitch needs data, valuation metrics, risk assessment and an investment thesis. Investment thesis is one of the most important parts of a stock pitch. So, what is it, and how can you write it perfectly?
1. What is an Investment Thesis?
Investment thesis is an important part of a stock pitch . It is a reasoned argument for an investment strategy, backed by research and analysis, and is used in all investment banking front office roles, along with private equity, hedge funds, and venture capital. The ultimate goal of an investment thesis is to present why an investment is worth its costs.
The structure of a stock pitch
1.1. Investment thesis is an integral part in buy-side interview
In buy-side interviews like private equity , hedge fund and venture capital , stock pitch is always a must, because that is what you’ll do on the job, and also the best way to set yourself apart. A great stock pitch will make you memorable in the eyes of the interviewers and investors. Therefore, knowing how to write a great investment thesis is no less important if you want to break into those industries.
1.2. Investment thesis questions rarely come up in investment banking interview
In investment banking , you won’t get “ pitch me a stock ” questions unless you interview for sales & trading division , or you mentioned that you have dealt with market transactions on your resume . Nevertheless, stock pitching in investment banking interviews is not a priority. You should only spend 30 minutes preparing for stock pitch questions. Focus more on concepts like DCF , free cash flow , WACC .
2. What Does an Investment Thesis Include?
A good investment thesis constitutes three parts: (1) an observation of macroeconomic & industry trends and your company’s positions within these trends , (2) a review of your company’s ability to support growth , (3) a summary where you give your conviction on the company .
In short, an investment thesis includes what you know and expect from the company, the factors supporting its potential growth, and why you are investing in it.
2.1. An observation of macroeconomic & industry trends and your company’s positions in these trends
In this part, you’ll research the current situation of the economy, the industry and how the macroeconomic factors will affect the potential of the chosen company. You’ll also look into where your company is located within those factors to give a convincing idea why the company is poised for growth.
The best way to do this part is to ask yourself questions. Here is how the process can be broken down
- Are the economy and the industry showing potential?
- Is the business cyclically strong in this particular time?
- Are fiscal/monetary policies supporting growth?
- What are the risks associated with the industry?
After that, focus on how your company is performing amid those external factors.
- Is it the fastest growing business in an equally-rapid growing industry, or is it a good house in a bad neighborhood, thriving against bleak macroeconomic outlooks?
- Is it market share rising or falling? How is it compared to its competitors?.
Here is an example of the macroeconomic and industry observation for Lazard.
Lazard is an investment bank, so first, give insights into the investment banking industry over the past few years. Research shows that bulge bracket banks are slowly losing their power because of the financial crisis, while independent advisory firms are becoming more competitive:
Figure 1: Investment banking industry overview
Then, find Lazard’s positions within these trends. As an independent advisor, what advantages does the company have over its bulge bracket counterparts? Where does it rank among other banks? Is there any room for potential growth?
Figure 2: Bulge brackets vs elite boutiques
Figure 3: Lazard’s ranking vs other investment banks
2.2. A review of the company’s characteristics that support growth
- Does the company have stable management?
- Are the financial statements clean?
- Which aspect of the company is offering excellent growth?
- How do metrics like profit, ROE, ROA, EPS change over the year/quarter?
- Do current company policies aim to maximize profit, or try to please investors and reach for stock gains?
For Lazard, the pitch focuses on its strength in asset management :
Figure 4: Lazard’s assets under management
Figure 5: Lazard’s organic flow growth vs its peers
Figure 6: Lazard’s AUM mix
A comparison with peer companies also adds more conviction to your analysis:
Figure 7: Lazard vs other elite boutiques
Finally, the pitch dives deep into the company’s policies and strategic planning:
Figure 8-14: Lazard’s strategic planning and policy
2.3. A summary of the reasons why the company is worth its price
This wraps up the macroeconomic and industry outlook, the company’s positions within those external factors, its own internal factors and risk/reward profile and presents why the company is worth the investment. The summary determines whether the pitch sells or not, so the more confident you are with your thesis, the better it will be.
For Lazard, after industry, company and policy analysis, the thesis concludes that the company is positioned for strong EPS growth:
Figure 15: Lazard’s verdict
Figure 16: Lazard’s EPS assumptions
3. How to Write an Investment Thesis
Writing a perfect investment thesis requires understanding of both the investors and the company . Research who you are pitching it for to find their preference, investment philosophy and strategies.
3.1. Understand fund’s strategies
- If you are pitching for a fixed-income fund , present them a bond that offers high yield at low risk
- For a short-seller , the best pitch is an overvalued company waiting to be sold short
- For growth equity , your best bet is a company in rapid expansion
- For a venture capital, bring them a start-up that promises reliable transition from cash-burning phase to stable cash flow
To research company’s information, you can visit the fund’s website or other blogs that follow hedge fund’s 13Fs closely like InsiderMonkey, ValueWalk . SEC filings can also be used to search for funds with over $100 million in assets under management.
3.2. Choose an idea with careful research
To do this, select an industry you are comfortable with, then find a promising company within that industry. The process can be time-consuming, picking one promising stock from hundreds of possible, but when you find that one company you are looking for, it will be worth all the effort. And remember, there is no right or wrong choice for a stock pitch. What matters are your analysis and conviction .
When researching companies, focus on the three main drivers of a stock: business quality, catalysts and valuation.
- A company with good business quality possesses stable earning growth compared to its competitors. It could be high return on capital, high margins or strong management. If you are pitching for a start-up, it must show a reliable path from cash-burning stage to positive cash flow.
- Catalysts are events that affect the price of a stock. They can be internal events like earnings announcements, product launch, acquisition and insider transactions. For example, if Apple plans to release a new iPhone, Apple’s share may rise as investors believe new products will generate higher income. Catalysts can also be external like monetary policies or global events. External catalysts tend to affect the entire market. They can either help the market reach new highs, or cause panic selling, like the 2013 “taper tantrum”.
- Valuation is important since investors want to buy stocks selling at a discount compared to others. Two commonly used valuation methods are relative valuation and absolute valuation . Relative valuation compares a company with other public companies through multiples like P/E and EV/EBITDA . It is important to find the right comparable companies with similar industry, size, growth rate, margin and revenue. Absolute valuation helps to determine the intrinsic value of the company based on its future cash flow using the discounted cash flow analysis . Firms prefer companies with lower intrinsic value compared to market value.
3.3. A step by step guide to writing an investment thesis
To write a stock pitch, follow three steps: (1) conduct initial research on the industry and select one special company within that industry, (2) analyze the company’s internal factors to show its potential growth, (3) summarize the research and give investment recommendations. These steps align with the structure of the investment thesis.
Step 1: Conduct initial research
After that, conduct market research to get industry data and identify trends. Look at market reports, industry insights and information to see what’s going on in the industry.
Next, screen out one exceptional company from that industry. You should find one that possesses stable management, high growth and undervalued compared to other companies. Also, try to find one that is less known because funds and interviewers always appreciate unique ideas.
Step 2: Analyze the company’s growth factor
Key points to look at include policies (is the management board’s direction good for its future?), metrics (are profit, EBIT, ROE , ROA , EPS on track for growth), and operation (how diversified is the company in its operation? Which aspect is showing potential?). Then present your analysis and projections with your research. Focus on the drivers mentioned above.
You can make comparisons with the industry and other companies to make your analysis more convincing. Bring the advantages your company has over its peers, and show why it is the most promising in the market.
Step 3: Summarize your research and give your conviction
Link your analysis to make your thesis more convincing. For example, when pitching for Harley-Davidson, a motorcycle company, after analysing how Harley-Davidson’s sales will keep falling due to the high price tag while not being able to attract new buyers, despite an ever growing motorcycle market, you can confidently recommend for a short.
That’s just a simple case, but you get the idea. By connecting the dots and presenting your argument with confidence, you can sell any pitch to anyone .
4. Investment Thesis Example
Figure 17-18: Starbucks’ investment thesis
Figure 19: Sony’s investment thesis
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- Asset Management Overview || Mutual Fund & ETF
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What Is an Investment Thesis?
- Understanding the Thesis
- What's Included?
The Bottom Line
- Portfolio Management
Investment Thesis: An Argument in Support of Investing Decisions
Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.
The term investment thesis refers to a reasoned argument for a particular investment strategy, backed up by research and analysis. Investment theses are commonly prepared by (and for) individual investors and businesses. These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients.
- An investment thesis is a written document that recommends a new investment, based on research and analysis of its potential for profit.
- Individual investors can use this technique to investigate and select investments that meet their goals.
- Financial professionals use the investment thesis to pitch their ideas.
Understanding the Investment Thesis
As noted above, an investment thesis is a written document that provides information about a potential investment. It is a research- and analysis-based proposal that is usually drafted by an investment or financial professional to provide insight into investments and to pitch investment ideas. In some cases, the investor will draft their own investment thesis, as is the case with venture capitalists and private equity firms.
This thesis can be used as a strategic decision-making tool. Investors and companies can use a thesis to decide whether or not to pursue a particular investment, such as a stock or acquiring another company. Or it can be used as a way to look back and analyze why a particular decision was made in the first place—and whether it was the right one. Putting things in writing can have a huge impact on the direction of a potential investment.
Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued . The thesis states that the investor plans to hold the stock for three years, during which its price will rise to reflect its true worth. At that point, the stock will be sold at a profit. A year later, the stock market crashes, and the investor's pick crashes with it. The investor recalls the investment thesis, relies on the integrity of its conclusions, and continues to hold the stock.
That is a sound strategy unless some event that is totally unexpected and entirely absent from the investment thesis occurs. Examples of these might include the 2007-2008 financial crisis or the Brexit vote that forced the United Kingdom out of the European Union (EU) in 2016. These were highly unexpected events, and they might affect someone's investment thesis.
If you think your investment thesis holds up, stick with it through thick and thin.
An investment thesis is generally formally documented, but there are no universal standards for the contents. Some require fast action and are not elaborate compositions. When a thesis concerns a big trend, such as a global macro perspective, the investment thesis may be well documented and might even include a fair amount of promotional materials for presentation to potential investing partners.
Portfolio management is now a science-based discipline, not unlike engineering or medicine. As in those fields, breakthroughs in basic theory, technology, and market structures continuously translate into improvements in products and in professional practices. The investment thesis has been strengthened with qualitative and quantitative methods that are now widely accepted.
As with any thesis, an idea may surface but it is methodical research that takes it from an abstract concept to a recommendation for action. In the world of investments, the thesis serves as a game plan.
What's Included in an Investment Thesis?
Although there's no industry standard, there are usually some common components to this document. Remember, an investment thesis is generally a proposal that is based on research and analysis. As such, it is meant to be a guide about the viability of a particular investment.
Most investment theses include (but aren't limited to) the following information:
- The investment in question
- The investment goal(s)
- Viability of the investment, including any trends that support the investment
- Potential downsides and risks that may be associated with the investment
- Costs and potential returns as well as any losses that may result
Some theses also try to answer some key questions, including:
- Does the investment align with the intended goal(s)?
- What could go wrong?
- What do the financial statements say?
- What is the growth potential of this investment?
Putting everything in writing can help investors make more informed decisions. For instance, a company's management team can use a thesis to decide whether or not to pursue the acquisition of a rival. The thesis may highlight whether the target's vision aligns with the acquirer or it may identify opportunities for growth in the market.
Keep in mind that the complexity of an investment thesis depends on the type of investor involved and the nature of the investment. So the investment thesis for a corporation looking to acquire a rival may be more in-depth and complicated compared to that of an individual investor who wants to develop an investment portfolio.
Examples of an Investment Thesis
Portfolio managers and investment companies often post information about their investment theses on their websites. The following are just two examples.
Morgan Stanley ( MS ) is one of the world's leading financial services firms. It offers investment management services, investment banking, securities, and wealth management services. According to the company, it has five steps that make up its investment process, including idea generation, quality assessment, valuation, risk management , and portfolio construction.
When it comes to developing its investment thesis, the company tries to answer three questions as part of its quality assessment step:
- "Is the company a disruptor or is it insulated from disruptive change?
- Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage?
- Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?"
Connetic Adventures is a venture capital firm that invests in early-stage companies. The company uses data to develop its investment thesis, which is made up of three pillars. According to its blog, there were three pillars or principles that contributed to Connetic's venture capital investment strategy. These included diversification, value, and follow-on—each of which comes with a pro and con.
Why Is an Investment Thesis Important?
An investment thesis is a written proposal or research-based analysis of why investors or companies should pursue an investment. In some cases, it may also serve as a historical guide as to whether the investment was a good move or not. Whatever the reason, an investment thesis allows investors to make better, more informed decisions about whether to put their money into a specific investment. This written document provides insight into what the investment is, the goals of the investment, any associated costs, the potential for returns, as well as any possible risks and losses that may result.
Who Should Have an Investment Thesis?
An investment thesis is important for anyone who wants to invest their money. Individual investors can use a thesis to decide whether to purchase stock in a particular company and what strategy they should use, whether it's a buy-and-hold strategy or one where they only have the stock for a short period of time. A company can craft its own investment thesis to help weigh out whether an acquisition or growth strategy is worthwhile.
How Do You Create an Investment Thesis?
It's important to put your investment thesis in writing. Seeing your proposal in print can help you make a better decision. When you're writing your investment thesis, be sure to be clear and concise. Make sure you do your research and include any facts and figures that can help you make your decision. Be sure to include your goals, the potential for upside, and any risks that you may come across. Try to ask and answer some key questions, including whether the investment meets your investment goals and what could go wrong if you go ahead with the deal.
It's always important to have a plan, especially when it comes to investing. After all, you are putting your money at risk. Having an investment thesis can help you make more informed decisions about whether a potential investment is worth your while. Make sure you put your thesis in writing and answer some key questions about your goals, costs, and potential outcomes. Having a concrete proposal in place can spell the difference between earning returns and losing all your money. And that's if your thesis supports the investment in the first place.
Harvard Business School. " Writing a Credible Investment Thesis ."
Lanturn. " What is an Investment Thesis and 3 Tips to Make One ."
Morgan Stanley. " Global Opportunity ."
Medium. " The Data That Built Our Fund's Investment Thesis ."
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Investing for financial return is only part of the equation.
How to Create an Investment Thesis [Step-By-Step Guide]
Updated on June 13, 2023
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One of the worst mistakes an investor can make is to sink their money into an investment without knowing why. While this may seem like the world’s most obvious mistake to avoid, it happens every day. Look no further than the stock market for plenty of examples of misguided optimism gone terribly wrong.
That’s where the idea of an investment thesis comes in. An investment thesis is a common tool used by venture capital investors and hedge funds as part of their investment strategy.
Most funds also use it on a regular basis to size up potential candidates during buy-side job interviews. But you don’t have to work at a venture capital fund or private equity firm to reap the benefits of creating an investment thesis of your own.
What Is an Investment Thesis?
An investment thesis is simply an argument for why you should make a specific investment. Whether it be a stock market investment or private equity, investment theses are all about creating a solid argument for why a certain acquisition is a good idea based on strategic planning and research.
While it takes a little more work upfront, a clear investment thesis can be a valuable tool for any investor. Not only does it ensure that you fully understand why you’re choosing to put your hard-earned money into certain stocks or other assets, but it can also help you develop a long-term plan.
Should an investment idea not go as planned, you can always go back to your investment thesis to see if it still holds the potential to work out. By considering all the information your thesis contains, you’ll have a much better idea of whether it’s best to cut your losses and sell, continue holding, or even add to your position.
An investment thesis includes everything you need to create a solid game plan, making it a foundational part of any stock pitch.
See Related : Best Socially Responsible Stocks To Invest In Today
Materials Needed To Create a Thesis for Your Investment Strategy
One of the benefits of an investment thesis is that it can be as complex or as simple as you like. If you actually work at a venture capital firm , then you may want to develop a full-on venture capital investment thesis. But if you’re a retail investor just looking to solidify your investment strategy, then your thesis may be much more straightforward.
If you’re an individual investor, then all you really need to create an investment thesis is somewhere to write it out. Whether it be in a Google or Word doc or on a piece of paper, just make sure you have a place to record your thesis so that you can consult it down the line.
If you’re developing a venture capital investment thesis that you plan to present to an investment committee or potential employers, then there are plenty of great tools online that can help. Slideteam has thousands of templates that can help you create a killer investment thesis , as well as full-on stock pitch templates.
A Step-by-Step Guide to Creating a Solid Investment Thesis
As mentioned earlier, an investment thesis holds the potential to help you plot out a strategy for pretty much any acquisition. But for the sake of simplicity, we’ll assume throughout the examples in the following steps that you’re an investor interested in going long on a stock that you plan to hold for at least a few months or years.
Venture capitalists looking to invest in companies or startups can also apply the same principles to other investment goals. Investors who are looking to short a certain stock should also be able to use these techniques to locate potential investments. The main difference, of course, is that you’ll be looking for bad news instead of good.
Step 1: Start With the Essentials
First things first. Before you get into doing the research that goes into an investment thesis or stock pitch, make sure you take the time to write out the basics. At the top of the page, include things like:
- The name of the company and its ticker symbol
- Today’s date
- How many shares of the company you already own, if any
- The current cost average for any shares you may already hold
- Whether the stock pays dividends and, if so, how often. You may also want to include the current ex-dividend and dividend payment dates.
- A brief summary of the company and what it does
See Related : How to Start Investing With Purpose
Step 2: Analyze the Current Market
Now it’s time to take a look at the entire market and the direction it’s headed. Why? As Investors Business Daily points out,
“History shows 3 out of 4 stocks move in the same direction as the overall market, either up or down. So if you buy stocks when the market is trending higher, you have a 75% chance of being right. But if you buy when the market is trending lower, you have a 75% chance of being wrong.”
While the overall market direction is definitely an important factor to keep in mind, what you choose to do with this information will largely come down to your individual investing style. Investors Business Daily founder William O’Neil advised investors only to jump into the market when it was trending up.
Another approach, however, is known as contrarian investing, which revolves around going against market trends. Warren Buffett summed up the idea behind this strategy with his famous quote, “Be fearful when others are greedy, and greedy when others are fearful.” Or as Baron Rothschild more graphically put it, “Buy when there is blood in the streets, even if the blood is your own.”
Most investors who are looking for a faster return will likely be better off waiting to strike until the iron is hot. If you align more with the long-term contrarian philosophy, however, bleak macroeconomic outlooks may actually strike you as an ideal investment opportunity .
See Related: How to Invest in Private Equity: A Step-by-Step
Step 3: Analyze the Company’s Sector
Now that you’ve got a look at the overall market, it’s time to take a look at the sector your company fits into. The Global Industry Classification Standard (GICS) breaks down the entire market into 11 sectors. If you want to get even more specific, you can further break down companies into the GICS’s 24 industry groups, 69 industries, and 158 sub-industries.
Once you identify which group your company belongs to, you’ll then want to take a look at that sector’s performance. Fidelity provides a handy breakdown of the performance of various sectors over different time periods.
But why does it matter? Two reasons.
- Identifying which sectors various companies belong to can help you ensure that your portfolio is properly diversified
- The reason that sector ETFs tend to be so popular is that when a sector is trending, many of the stocks within that sector tend to move in unison. The reverse is also true. When a certain industry is lagging, the individual stock prices of the companies in that industry may be affected negatively. While this is not always the case, it’s a general rule of thumb to keep in mind.
The idea behind working sectors into your investment criteria is to give you an overview of what type of investment you’re about to make. If you’re a momentum trader, then you may want to shoot for companies within the strongest-performing sectors this year or even over the past few months.
If you’re a value investor, however, you may be more open to sectors that have historically experienced high growth, even if they are currently suffering due to the overall state of the economy. Some speculative investors may even be interested in an innovative industry with strong potential growth possibilities, even if its time has not yet come.
See Related : How to Invest in Community [Step-by-Step Guide]
Step 4: Analyze the Company’s Position Within Its Sector
If you want to up your odds of success even more, then you’ll want to compare the company you’re interested in against the performance of similar companies in the same industry.
These are the companies that tend to get the most attention from large, institutional investors who are in a position to significantly increase their market value. Institutional investors tend to have a huge amount of money in play and are far less likely to invest in a company without a proven track record.
When choosing an investment, they’ll almost always go with a global leader over a new business, regardless of its promise. However, they also consider intrinsic value, which considers how much a company’s stock is selling for now, as opposed to how much revenue the company stands to earn in the future. In other words, institutional investors are looking for companies that are stable enough to avoid surprises but that also stand to generate considerable capital in the future.
Why work this into your game plan? Because even if you don’t have millions of dollars to invest in a company, there may be hedge funds or venture capital firms out there that do. When these guys make an investment, it tends to be a big one that can actually move a company’s share price upward. Why not ride their coattails and enjoy a solid growth rate as they invest more money over time into proven winners?
That’s why it’s important to make sure that you see how a company stacks up against its closest competitors. If it’s an industry-leading business with a large market share, it’s likely to be a strong contender with solid fundamentals. If not, you may end up discovering competing companies that make sense to consider instead.
See Related : What is a Triple Bottom Line? Definition & Examples
Step 5: Identify the Catalyst
At this point, hopefully, you’ve identified the best stock in the best sector based on your ideal investing style. Now it’s time to find out exactly why it deserves to become a part of your portfolio and for how long.
If a company has been experiencing impressive growth, then there’s bound to be a reason why.
- Is the company experiencing a major influx of business because it’s currently a leader in the hottest sector of the moment? Or is it a “good house in a bad neighborhood” that’s moving independently of the other stocks in its industry?
- How long has it been demonstrating growth?
- What appears to be the catalyst behind its movement? Does the stock owe its growth to strong management, recent world events, the approval of a new drug, the introduction of a hot new product, etc?
One mistake that far too many beginning investors make is assuming that short-term growth alone always indicates the potential for long-term profit. Unfortunately, this is not always the case. By figuring out exactly why a stock is moving, you’ll be far better positioned to decide how long to hold it before you sell.
A strong catalyst can cause the price of a stock to skyrocket overnight, even if it’s laid dormant for years. Even things like social media hype and rumors can cause a stock’s price to shoot up over the course of a given day. But woe to the investor that assumes these profits will last. Many are often left holding the bag when the price increase turns out to be part of a “ pump and dump .”
While many day traders can make a nice profit by capitalizing on these situations, such trades are best avoided altogether if you plan to hold a stock long-term. That’s why it’s so important to understand whether a stock is “in play” for the day or whether its growth can be attributed to more permanent factors that support the potential for a high return over time.
See Related : How to Become an Impact Investor [Step-By-Step Guide]
Step 6: Solidify Your Thesis With Analysis
If you’re planning on investing a significant amount of capital in any stock, then a little research may be able to save you from a lot of heartache. Keep in mind that the focus of an investment thesis is to formulate a reasoned argument about why adding an asset to your portfolio is a good idea.
While all investments come with some level of risk, research can be an excellent risk mitigation strategy. There’s nothing worse than watching an investment fail due to an obvious factor you could have spotted with closer analysis. Don’t let it happen to you!
Fundamental analysis can help you ensure that your potential investments have the underlying traits that winning stocks are made of. While there’s a bit of a learning curve involved when you’re first starting out, here are some of the things you’ll want to focus on:
EPS stands for “earnings per share.” It’s a common financial indicator that basically tells you how much a company makes each time it sells a share of its stock. In this regard, a higher EPS is a good thing, but it’s important to look for solid EPS growth over time. Ideally, you’ll want to see consistent growth in a company’s EPS over the past three or more quarters.
Sales and Margins
Investing is all about putting your cash into successful companies, which is why sales and margins are key components to finding worthy investments. Sales indicate how much a business has made from (you guessed it) sales. Sales margin, also known as gross profit margin, is the amount of revenue a company actually gets to keep after you factor in overhead and other production costs. Ideally, a good investment will exhibit strong, consistent sales growth in recent years.
Return On Equity (ROE)
ROE is one of the more commonly used valuation metrics and is calculated by dividing the company’s net income/shareholders’ equity. ROE is basically a measure of how efficiently a company is using the capital it generates from equity fundraising to increase its own value. The higher the ROE, the more likely it is that a company operates with a focus on using its cash flow to increase its profits.
See Related : How to Do a Stakeholder Impact Analysis?
Free Tools To Help Strengthen Your Investment Strategy
While these are just a few examples of various analysis methods to work into your investment thesis, they can go a long way toward locating solid companies worth investing in. Interested in learning more about technical and fundamental analysis? There are now plenty of great sites that can help you master the secrets of the training world.
In our opinion, Tradimo is one of the most underrated, as it provides tons of free classes for investors of all levels. Udemy also has some great classes that can help you learn how to beef up your investment thesis with as much quality information as possible.
But keep in mind that these are only suggestions. The most important part of any personal investment thesis is that it makes sense to you and can serve as a valuable tool to help you along your investing journey.
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Writing a Credible Investment Thesis
by David Harding and Sam Rovit
Every deal your company proposes to dobig or small, strategic or tacticalshould start with a clear statement how that particular deal would create value for your company. We call this the investment thesis . The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business." 10
Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity businesswhich in our experience is more disciplined in crafting investment theses than are corporate buyersthe odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29 percent of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40 percent had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.
Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83 percent of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. 11 In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. 12 They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.
Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.
This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much." 13
And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.
Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.
Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark, and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:
Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.
Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:
- Leveraging an existing sales force more extensively
- Using the balance sheet to roll up and fund an undercapitalized business
- Applying operating skills learned in the radio trade
Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors, and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.
Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and whitewrapping specific words around the ideasallows them to circulate the thesis internally and to generate reactions early and often.
The perils of the "transformational" deal . Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.
The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.
Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPontwhich after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industryand General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Fordand win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.
In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage-can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14
But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.
By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. 15 The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."
On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" dealswhereby companies threw themselves bodily into a new line of businessdestroyed an average of 5.3 percent of market value immediately after the deal's announcement. Translating these findings into our own terminology:
- Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
- The market is likely to reward the former and punish the latter.
The dilution/accretion debate . One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate . We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.
Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares, or buying something else). An accretive deal, of course, has the opposite outcomes.
But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?
Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:
It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20 percent return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15 percent a year. Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level. 16
Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." 17 Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?
The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."
Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.
[ Buy this book ]
David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.
Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.
10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.
11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.
12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.
13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.
14. Rolf BÃ¶rjesson, interview by Tom Shannon, Bain & Company. London: 2001.
15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).
16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)
17. Mike Bertasso, correspondence with David Harding, 15 December 2003.
How to Create an Investment Thesis
What it is, why you want one, and how to create it.
One of the essential elements in a venture capital firm is the investment thesis. The thesis can come in many varieties, from broad and loosely defined focuses to a specific vertical and company stage. On the other hand, some investors choose to allocate capital without a core thesis driving their decisions and see success in this strategy. This post will define an investment thesis, why investors decide to develop one, and some tips on creating one.
What is an investment thesis?
Simply put, the investment thesis is an assumption made about a market, vertical, or trend that will drive the strategy for a particular firm or fund. Just as a startup will assume a problem or market need and build a product around solving that problem, an investor will consider various markets and trends and develop an investment strategy focused on that assumption.
Why develop an investment thesis?
The thesis is the driving force behind what a firm chooses to focus on to generate returns. It will be a fundamental part of how VCs decide what to look for in specific markets, source deals, and where they ultimately decide to invest their capital. The thesis helps keep a firm focused, allowing investors to work within particular parameters when they go about their business.
There are a couple of advantages to having a thesis-driven approach as a venture capital firm. It will drive relationships that the firm pursues. This relationship driver applies to how firms source deals from an investment standpoint and choose their limited partners. These relationships with experts in a particular vertical will help portfolio companies with mentorship, independent board seats, and talent sourcing.
A thesis compels VCs to be experts within their particular field. If a firm bases its thesis around FinTech, it will most likely have some expertise in that field. This knowledge will help them understand the marketplace, specific problems a startup is trying to solve and judge founder talent. The firm will also be a thought leader in the space by releasing analysis and reporting trends in the industry. Lastly, the firm's partners will be a better value-add to the companies within their portfolio, paving a quicker path for a startup's growth and success.
Example of a thesis
A16Z , a prominent Silicon Valley firm, has several different areas they invest in, from FinTech to Growth to Consumer focused startups. Below is their investment thesis for their FinTech portfolio:
"Fintech companies are innovating across broad categories — in banking, lending, insurance, real estate, and investing — both on the customer-facing side and in core infrastructure. We believe the combination of mobile, digital money, machine learning, and new data sources offers startups a unique opportunity to leapfrog outdated infrastructure and compete with incumbent financial institutions to reimagine the way we manage our finances." Source
We understand that the firm focuses on startups that use mobile and machine learning to innovate on financial management through this statement. This thesis has helped drive the firm's investments in Stripe (now valued at $36B) and Carta (currently valued at $3.3B).
For an awesome hub of investment thesis examples, check out this link !
How to build an investment thesis
When developing a thesis, there are vital things to keep in mind:
Markets : Start with market sizing to make sure that a particular industry is worth pursuing. We will discuss market sizing strategies in a future post.
Trends: Understand macro trends impacting the markets and industries that you determine are big enough to pursue.
Companies : Break down each company within a market that has upside potential. Look at recent companies that have seen success within your specific industry focus.
Exits : Make sure there is an exciting exit environment for companies in that particular segment. You want your investments to see a return through going public or M&A activity.
Tips on the above:
Things to think about defining in a thesis would be company stage, geography, vertical, or market.
People tend to want a fully-formed thesis right off the bat, but it's an iterative process. The scrum process might be three months, but the full process can take a year before talking about a thesis publicly.
Have a hunch on something that isn't fully formed and then test it out:
Go out and talk to entrepreneurs.
Talk to buyers of the technology.
Form relationships with ecosystem partners.
Incrementally improve your thesis based on feedback and results.
For some more tips and strategies on creating a thesis, check out this informative Medium post .
The thesis can help you stay focused and is your north star. For startups, it will help them target your firm. For LPs, it will help them judge your conviction and investment strategy. When developing a thesis, think about taking on big problems and big ideas. There are so many significant issues to be solved globally, and we have a golden opportunity to help solve them. Think big, and don't limit yourself only to ideas on making returns for investors, but how to impact the world.
This story is from Sutton Capital contributor Zeb Hastings. For more information on Zeb’s work, please visit his website .
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How to write the perfect investment thesis.
For investment managers, finding investment opportunities is only half the challenge. Often the harder part is raising funds. To do this they need to create the perfect investment thesis to set out a convincing argument as to why their investment strategy will generate a return on investment for their clients. In this article, we’ll explore the importance of crafting a perfect investment thesis and provide insights into how to write one.
What is an Investment Thesis?
An investment thesis outlines a fund manager’s investment strategy and rationale for investing in a particular market or niche. It’s a crucial document that investment managers use to provide investors with the information and data they need to decide whether or not to invest in a fund. It can be turned into a variety of marketing materials for the fund including white papers, one-pagers, and investment decks.
The investment thesis should be concise and articulate the investment logic and framework for why a particular market or niche presents an attractive investment. It should outline the investment strategy and how it aligns with the fund manager’s hypothesis. The thesis should also address potential risks and benefits to investors.
Successful investment theses typically include an analysis of market trends, an assessment of the competitive landscape, and an explanation of why the investment opportunity presents an attractive opportunity.
In 2013, Ron Baron, a fund manager, invested in Tesla. At the time the stock was trading at $25 per share. However, Baron believed that electric cars were the future , and he was convinced that Tesla would become the leader in the EV industry. Ten years later, Tesla’s stock is trading at over $200 per share, making it one of the most successful investments in recent years.
Step-by-Step Guide to Writing the Perfect Investment Thesis
Crafting the perfect investment thesis is not an easy task. It requires a great deal of research, analysis, and writing skills. Follow our step-by-step guide to write a perfect investment thesis.
Step 1: Define Your Investment Strategy
Determine your investment goals and objectives.
To define your investment strategy, you need to first need to understand your investment goals and objectives. Are you looking to invest in high-growth companies or established companies that generate a stable return? What is your investment horizon? What is risk profile? How much capital do you need to raise?
Identify investment opportunities
Once you have defined your investment goals and objectives, you need to identify your target market and investment opportunities in that market.
Define your investment strategy
Having determined your goals, risk tolerance and capital requirements you need to create a high-level investment strategy. This is a set of principles that will help the fund achieve its investment goals and guide investment decisions. This can be refined as you conduct market research and receive feedback from investors and industry-peers.
Step 2: Conducting Market Research
An investment thesis that is not backed by data is just opinion. To write the perfect investment thesis you need to conduct market research. This includes analyzing market trends, identifying potential risks and benefits, and conducting competitive analysis.
How to analyze market trends using data
To analyze market trends, you need to collect and analyze data. Data can come from a variety of sources including industry reports, financial statements, and news articles to identify trends in the market. You can also use tools such as Google Trends to identify search trends for specific keywords. There are also opportunities to use official data to back up claims, for example census data to prove an investment thesis based on demographic trends.
A variety of alternative data sources are available. these include:
Web scraping : Scraping data from online sources including social media sites, e-commerce or news stories. This data can be analyzed using natural language processing techniques (categorization, sentiment analysis).
Open data : There is a growing trend of organizations making data freely available. Good examples include traffic patterns on metro networks such as TFL in London .
Sensors and satellites : A growing industry of data providers is providing access to alternative data sources. From satellite data showing agricultural production to IoT sensor devices.
Polls and Surveys : Surveys provide insights into the collective consciousness. From tangible economic behaviors such as buying and shopping habits, customers expectations, information on personal finances, to social and political views.
Identifying market opportunities and potential risks
Having analyzed market trends, you need to identify market opportunities and potential risks. Investors need to be aware of different types of investment risks, such as market risk, credit risk, and liquidity risk associated with your investment thesis. A thorough analysis of potential risks helps investors make informed decisions and ensure that the investment is aligned to their risk appetite. The analysis should cover both systematic and unsystematic risks, There are a variety of statistical methods than can be used to measure risk and volatility including standard deviation, Sharpe ratio, beta, value at risk (VaR), conditional value at risk (CVaR), and R-squared.
Conducting competitive analysis
You may also want to include a competitive analysis. This looks at the competition in your target market. Who are the main players in the industry, their strengths, weaknesses, and competitive advantage.
Step 3: Developing Your Investment Hypothesis
The best investment theses include a well structured investment hypothesis. An investment hypothesis summarises why an investment opportunity exists in a given market. It should be based on your research and analysis and articulated in a clear and concise manner.
What is an investment hypothesis?
An investment hypothesis is a proposed explanation for a specific investment opportunity. It’s a statement that describes the investment opportunity and how it aligns with the investment manager’s investment goals and objectives.
Formulating an investment hypothesis based on your research and analysis
To develop a strong investment hypothesis, you need to review the data and information collected during your market research. Using this you need to identify key trends, opportunities, and risks and determine an investment strategy that allows you to achieve investment goals and objectives. This is the time to revisit and critique your initial investment strategy.
H4: Articulating the investment thesis in a clear and concise manner
Once you have developed your investment hypothesis, you need to articulate it in a clear and concise manner. This includes a clear investment logic and analytical framework for why a particular market or niche presents an attractive investment. You should also outline the investment strategy and how it aligns with your hypothesis.
Step 4: Writing the Investment Thesis
Having created the perfect investment thesis you need to structure the thesis and include key elements to make it persuasive.
The structure and format of a successful investment thesis
A successful investment thesis typically follows a structure that includes an executive summary, market analysis, investment hypothesis, investment strategy, and potential risks and benefits. The thesis should also include data and visual aids, such as graphs and charts.
Key elements to include in your investment thesis
To make your investment thesis persuasive, you need to include key elements such as a clear articulation of the investment opportunity, a detailed explanation of the investment hypothesis, an overview of the investment strategy, and describe the risks and benefits for potential investors.
Writing with clarity and brevity
To make your investment thesis easy to read and understand, you need to write with clarity and brevity. Use simple language and avoid jargon. Keep the thesis concise and to the point.
What type of resources and marketing materials do you need to create
Having defined your investment thesis you know need to create a variety of marketing materials in order to present to potential investors. These will vary depending on the type of investors and the regulatory framework you operate under. Some common investor marketing materials include:
An investor deck is a summary of your investment thesis. It should include a summary of your investment hypothesis, market opportunity with data, investment strategy, expected outcomes, risks, and benefits to investors. The investor deck should be concise and easy to understand. Avoid lengthy text and present the opportunity using relevant data points. Employing a professional designer will maximize the impact of your investment thesis.
The structure of an investment deck forces you to focus only on the key points, consequently a clear analytical framework or investment logic is essential.
A white paper is a more detailed description of your investment thesis. It should include an in-depth analysis of the market trends, competitive landscape, and investment opportunity. The white paper should also include an overview of your investment strategy and potential risks and benefits.
An investment one-pager is a brief summary of your investment hypothesis, market opportunity, and risks and benefits. It should be a one-page document that investors can quickly review to understand your investment opportunity.
Step 5: Refining and Perfecting Your Investment Thesis
The final step in writing a perfect investment thesis is to refine and perfect it. You need to continuously refine and improve your thesis to ensure it’s persuasive and effective.
Revising and editing your investment thesis
Once you have written your investment thesis, you need to revise and edit it. Review the thesis for grammar, punctuation, and spelling errors. Ensure that the thesis is clear, concise, and persuasive. Nothing will damage your credibility more than easily fixed errors or incorrect data.
Seek feedback from peers and industry experts
You should seek feedback from peers and industry experts to ensure that your investment thesis is persuasive and effective. Aim to get feedback from colleagues, mentors, or industry experts all of whom can offer a unique outside perspective.
Continuously refining and improving your investment thesis
Investment managers should continuously refine and improve their investment thesis. They should review the thesis periodically and update it as needed to reflect changes in the market or investment strategy.
Crafting a perfect investment thesis is a crucial task for investment and fund managers. The investment thesis is a document that outlines the investment strategy and rationale for investing in a particular market or niche. A good investment thesis provides investors with a clear understanding of the investment opportunity, the risks and benefits, and the potential return on investment.
To write a perfect investment thesis, investment managers need to define their investment strategy, conduct market research, develop an investment hypothesis, craft the thesis, and refine and perfect it. They should also create marketing materials such as an investor deck, white paper, and investment one-pager to summarize their investment opportunity. Investment managers should continuously refine and improve their investment thesis to ensure it’s persuasive and effective.
How Interpretive Economics can help you write the perfect investment thesis
At Interpretive Economics, we help investment managers, asset managers, venture capital, family offices and other investment professionals create a variety of investment marketing materials including investment white papers, investor decks and investment one-pagers. We are experts at economic analysis, sourcing and analyzing data and crafting investment hypotheses. Get in touch to see how we can help you create the perfect investment thesis.
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Tips and Examples for Writing Thesis Statements
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This resource provides tips for creating a thesis statement and examples of different types of thesis statements.
Tips for Writing Your Thesis Statement
1. Determine what kind of paper you are writing:
- An analytical paper breaks down an issue or an idea into its component parts, evaluates the issue or idea, and presents this breakdown and evaluation to the audience.
- An expository (explanatory) paper explains something to the audience.
- An argumentative paper makes a claim about a topic and justifies this claim with specific evidence. The claim could be an opinion, a policy proposal, an evaluation, a cause-and-effect statement, or an interpretation. The goal of the argumentative paper is to convince the audience that the claim is true based on the evidence provided.
If you are writing a text that does not fall under these three categories (e.g., a narrative), a thesis statement somewhere in the first paragraph could still be helpful to your reader.
2. Your thesis statement should be specific—it should cover only what you will discuss in your paper and should be supported with specific evidence.
3. The thesis statement usually appears at the end of the first paragraph of a paper.
4. Your topic may change as you write, so you may need to revise your thesis statement to reflect exactly what you have discussed in the paper.
Thesis Statement Examples
Example of an analytical thesis statement:
The paper that follows should:
- Explain the analysis of the college admission process
- Explain the challenge facing admissions counselors
Example of an expository (explanatory) thesis statement:
- Explain how students spend their time studying, attending class, and socializing with peers
Example of an argumentative thesis statement:
- Present an argument and give evidence to support the claim that students should pursue community projects before entering college
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- How to Write a Thesis Statement | 4 Steps & Examples
How to Write a Thesis Statement | 4 Steps & Examples
Published on January 11, 2019 by Shona McCombes . Revised on August 15, 2023 by Eoghan Ryan.
A thesis statement is a sentence that sums up the central point of your paper or essay . It usually comes near the end of your introduction .
Your thesis will look a bit different depending on the type of essay you’re writing. But the thesis statement should always clearly state the main idea you want to get across. Everything else in your essay should relate back to this idea.
You can write your thesis statement by following four simple steps:
- Start with a question
- Write your initial answer
- Develop your answer
- Refine your thesis statement
Table of contents
What is a thesis statement, placement of the thesis statement, step 1: start with a question, step 2: write your initial answer, step 3: develop your answer, step 4: refine your thesis statement, types of thesis statements, other interesting articles, frequently asked questions about thesis statements.
A thesis statement summarizes the central points of your essay. It is a signpost telling the reader what the essay will argue and why.
The best thesis statements are:
- Concise: A good thesis statement is short and sweet—don’t use more words than necessary. State your point clearly and directly in one or two sentences.
- Contentious: Your thesis shouldn’t be a simple statement of fact that everyone already knows. A good thesis statement is a claim that requires further evidence or analysis to back it up.
- Coherent: Everything mentioned in your thesis statement must be supported and explained in the rest of your paper.
Receive feedback on language, structure, and formatting
Professional editors proofread and edit your paper by focusing on:
- Academic style
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See an example
The thesis statement generally appears at the end of your essay introduction or research paper introduction .
The spread of the internet has had a world-changing effect, not least on the world of education. The use of the internet in academic contexts and among young people more generally is hotly debated. For many who did not grow up with this technology, its effects seem alarming and potentially harmful. This concern, while understandable, is misguided. The negatives of internet use are outweighed by its many benefits for education: the internet facilitates easier access to information, exposure to different perspectives, and a flexible learning environment for both students and teachers.
You should come up with an initial thesis, sometimes called a working thesis , early in the writing process . As soon as you’ve decided on your essay topic , you need to work out what you want to say about it—a clear thesis will give your essay direction and structure.
You might already have a question in your assignment, but if not, try to come up with your own. What would you like to find out or decide about your topic?
For example, you might ask:
After some initial research, you can formulate a tentative answer to this question. At this stage it can be simple, and it should guide the research process and writing process .
Now you need to consider why this is your answer and how you will convince your reader to agree with you. As you read more about your topic and begin writing, your answer should get more detailed.
In your essay about the internet and education, the thesis states your position and sketches out the key arguments you’ll use to support it.
The negatives of internet use are outweighed by its many benefits for education because it facilitates easier access to information.
In your essay about braille, the thesis statement summarizes the key historical development that you’ll explain.
The invention of braille in the 19th century transformed the lives of blind people, allowing them to participate more actively in public life.
A strong thesis statement should tell the reader:
- Why you hold this position
- What they’ll learn from your essay
- The key points of your argument or narrative
The final thesis statement doesn’t just state your position, but summarizes your overall argument or the entire topic you’re going to explain. To strengthen a weak thesis statement, it can help to consider the broader context of your topic.
These examples are more specific and show that you’ll explore your topic in depth.
Your thesis statement should match the goals of your essay, which vary depending on the type of essay you’re writing:
- In an argumentative essay , your thesis statement should take a strong position. Your aim in the essay is to convince your reader of this thesis based on evidence and logical reasoning.
- In an expository essay , you’ll aim to explain the facts of a topic or process. Your thesis statement doesn’t have to include a strong opinion in this case, but it should clearly state the central point you want to make, and mention the key elements you’ll explain.
If you want to know more about AI tools , college essays , or fallacies make sure to check out some of our other articles with explanations and examples or go directly to our tools!
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A thesis statement is a sentence that sums up the central point of your paper or essay . Everything else you write should relate to this key idea.
The thesis statement is essential in any academic essay or research paper for two main reasons:
- It gives your writing direction and focus.
- It gives the reader a concise summary of your main point.
Without a clear thesis statement, an essay can end up rambling and unfocused, leaving your reader unsure of exactly what you want to say.
Follow these four steps to come up with a thesis statement :
- Ask a question about your topic .
- Write your initial answer.
- Develop your answer by including reasons.
- Refine your answer, adding more detail and nuance.
The thesis statement should be placed at the end of your essay introduction .
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Is this article helpful?
Other students also liked, how to write an essay introduction | 4 steps & examples, how to write topic sentences | 4 steps, examples & purpose, academic paragraph structure | step-by-step guide & examples.
I'm still unsure of the difference of an essay structure or plan, and the thesis statement, or claim. Aren't they the same?
Jack Caulfield (Scribbr Team)
A thesis statement is a sentence or two in your essay or paper that expresses the main argument you intend to get across in the text. It's a way of getting across your ideas to the reader in the text itself.
Meanwhile, an essay outline is more something for yourself, to help you plan out your structure before you start writing or to show your instructor that you have a clear structure in mind. It's not something that you include in the final text, but an earlier stage in the writing process.
Still have questions?
What is your plagiarism score.
Industry Analysis - July 31, 2020
How to Develop an Investment Thesis
Welcome to the third and final installment of this introductory series about startup portfolio management! If you’ve enjoyed these articles, let us know! Or tell us what you’d like to learn about next. Send suggestions and feedback to Aryelle Young, our Head of Content Production, at [email protected].
A Quick Recap
For those just joining us, in my first post we discussed creating a portfolio plan and developed a hypothetical plan in which we will invest $10,000 across 25 companies with a $200 initial investment per company. In the second post , we discussed investor strategy and reviewed the various startup investment vehicles available to accredited and non-accredited investors. Given our relatively limited budget and the need to build a diversified portfolio while we learn the ropes of startup investing, we decided to put our money to work mainly through crowd investing platforms.
The Anatomy of an Investment Thesis
Now comes the fun part — developing your investment thesis (also referred to as an investment themes or investment strategy). Regardless of what you call it, an investment thesis is essentially a method used to narrow the number of companies down to just those that you are willing to consider for an investment. It is about defining what you are interested in and filtering out what doesn’t interest you. An investment thesis is your opportunity to be creative and opinionated about technology, industries, markets, macro trends, and business models. And since all investing is about the future, your thesis is a reflection of your views about what the future holds.
Now let’s discuss the elements of an investment thesis and look at a few examples from venture capital firms before we jump into developing our own thesis. Based on my observations, there are nine commonly used elements in an investment thesis. This list is by no means exhaustive or definitive.
- Product Type — Hardware, Software, Goods, and Services
Hardware or software. This is one traditional way to categorize startups since many are tech-focused. But don’t forget about the direct-to-consumer (DTC) startups that make physical/manufactured goods or startups that offer services rather than goods. More and more companies are using a combination of these methods to deliver solutions to their customers — like IoT and Smart Home companies.
- End Customer — Consumer, Enterprise, or Government
Consumer, enterprise, or government. Each of these end customer markets tend to have different solution requirements, procurement practices, and support expectations. Those differences result in specific organizational structures and priorities for the companies competing to serve them.
- Industry — Traditional or Hybrid Sectors
Technology, finance, energy, real estate, communications, transportation, healthcare, retail, advertising… There’s a nearly endless list of industries. Technology has infiltrated many of them to create hybrid industries or sub-industries like fintech, cleantech, ecommerce, and proptech. A lot of startup activity occurs in these hybrid industries. Each industry has unique characteristics and trends that an investor needs to know. Choosing an industry is a good way to narrow the focus of an investment thesis.
- Company Stage — Early, Growth, or Late Stage
Early stage, growth stage, or late stage. These are commonly used terms to describe a company’s stage. However, investors often define the stages differently. Many investors use fundraising stages because startups tend to encounter similar challenges at a given fundraising milestone. Thesis-wise, investors often focus on one particular stage, but they often give themselves leeway to drift a little earlier or later depending on the company.
- Fundraising Stage : Friends & Family, Pre-seed, Seed, Series A-B, Series C and beyond.
- Product Stage : Pre-product, post-product (pre-revenue), and post-revenue.
- Fit Stage : Problem-solution fit, product-market fit (PMF), and product-channel fit.
- Geography — Local, “2nd Tier” Cities, and International Markets
Geographic focus is often about identifying supply-demand imbalances between talent and funding. It also involves taking advantage of differences in cost of living and business conditions.
- Local : Some investors may use a “local” market strategy to develop a deep network and strong reputation.
- 2nd Tier Cities : Some investors focus on “2nd tier” cities like Austin, Denver, Atlanta, Phoenix, or Boise (to name a few) where there is a good supply of talent but disproportionately less access to capital.
- International markets : Typically the domain of large VCs, investing in international markets introduces risk, cost, and complexity that act as barriers to entry.
- Science & Technology — AI, AR, Blockchain, Robotics, and Biotech
Whether technology is the solution or enables the solution, it is hard to deny that technology is a key component of many startups’ strategy. Thus, there are “deep tech” investors that see these “disruptive” technologies as driving the future of the economy. These investors tend to have a strong technical background and domain knowledge that allows them to develop a long-term thesis behind technologies like AI, AR, blockchain, robotics, and biotech (to name a few).
- Business & Financial model — SaaS, Marketplace, and Data Monetization
Science and technology are not the only drivers of innovation. Any business function or element of a business model can help differentiate a startup’s strategy. Software-as-a-Services (SaaS) and subscription pricing models are business and pricing model innovations that have attracted a lot of fans and found their way into private and public companies. Marketplace business models have enabled companies to build strong network effects. Asset-light financial models have reduced capital requirements. On the more controversial side, providing free or subsidized services to customers in exchange for collecting and monetizing user data has given birth to some of the largest and most profitable companies.
- Macro Trends — Cultural, Demographic, and Regulatory Changes
Many elements of a thesis are about the entrepreneur, product, tech, or business model as the source of innovation and, therefore, the driver of change. However, macro trends are the massive tectonic changes that often spark multi-year or multi-decade opportunities. Smart investors and entrepreneurs respond to and leverage these opportunities in their theses. While technology may be involved in these trends, often the initial need or change originates from cultural, demographic, political, or regulatory changes.
As you’ve no doubt heard before, regulatory changes via the JOBS Act of 2012 was the driver that opened up the crowdfunding movement. Demographic and cultural differences between Baby Boomers and Millennials generations are driving opportunities to address everything from the rising cost of healthcare to changing views about home ownership and lifestyle preferences. Perhaps the most sobering example is the macro event we are living through right now. We are still figuring out how the coronavirus pandemic will affect how we live, work, and socialize long-term.
- Impact — Social, Environmental, Equality, Educational, and Wellness
Impact investing attempts to put the philosophy of “doing well by doing good” into action. It recognizes that there are a number of ways to make money, so why not choose a strategy that also positively impacts our communities. In some cases, an impact thesis may add additional hurdles to a startup’s success. But it also has the potential to mobilize a passionate and appreciative customer and stakeholder base. Impact theses often focus on social, environmental, equality, inclusion/access, wellness, and education. In some cases, they have even grown into macro trends.
In recent weeks, we’ve seen several VCs and large companies launch funds focused on backing minority and underrepresented founders. For more than a decade, cleantech and renewable energy startups have worked to deliver a product that the market already has access to — energy — but in a way that is less environmentally harmful (and eventually lower cost). Meanwhile, wellness startups often address personal and mental health needs that were previously ignored and awkward to talk about.
Examples from Venture Capital Firms
Ok, that was a lot of information. Let’s take a look at some real investment theses from well-known VC firms. These examples show that you can be a successful investor with a number of different approaches.
New Enterprise Associates (NEA)
NEA has developed deep domain expertise and insight into our industries of focus. We channel that knowledge into every technology and healthcare investment we make — at any stage, in any location, around the globe.
NEA — one of the oldest and largest VC firms — has a pretty straight forward thesis. They are focused on technology and healthcare. As they clearly state, they are stage and location agnostic. So their thesis is narrow on industries but broad on everything else.
First Round Capital
Instead of predicting the future, we look to our founders to convince us of what’s next. That’s why we don’t focus on any one sector. The one thing each of our companies has in common — we met them when they were just a couple of people with an idea and a slide deck.
First Round Capital is an early stage VC that is focused on founders and wants to put the first institutional money into a company. That focus tends to make them industry agnostic. First Round’s portfolio reflects a wide range of consumer and enterprise, hardware and software companies.
Union Square Ventures (USV)
USV backs trusted brands that broaden access to knowledge, capital, and well-being by leveraging networks, platforms, and protocols.
While First Round Capital relies on founders to bring the thesis to them, USV leads with their own opinion of where opportunities lie. But rather than naming industries like NEA, USV’s Thesis 3.0 describes the outcome they want their investments to deliver. USV is not picky about how a company achieves the desired outcome. However, they do have preferred business and technology strategies that they look for in prospective portfolio companies.
Madrona Venture Group (Madrona)
Madrona’s thesis is more detailed than our previous examples. Like USV, Madrona brings a holistic view to their investment approach. Their 6-part thesis weaves together a narrative that tells you what they are focused on and why. Below are 3 of the more interesting themes.
- Future of work — Build and retain diverse and distributed workforces and transition from “in-person” to digital-first workflows and processes.
- Intersection of innovation — Biological and chemical sciences are intersecting with computer and data sciences in precision medicine, digital pathology, proteomics and more.
- Low-code & no-code — The next generation of workers is more tech savvy, and there are more “makers” in business teams and organizations who want to build things directly and not wait for IT, engineering or the data science team.
Developing Your Own Thesis
Now it’s your turn. But before you dive straight in, here are some helpful suggestions.
Consider your experience, knowledge, and interests
To be successful, you need to understand the market landscape and trends related to the companies you invest in. If you lack the knowledge or desire to learn a particular space, strike it from your thesis. Since you aren’t a VC fund, you don’t have to please institutional investors or anyone else with your thesis.
Startups often take 10 years to reach the scale needed for an exit. So make sure you are investing based on an enduring strategy. Consider how the world may change between now and then but also consider what will not change.
Keep it simple.
Don’t try to incorporate all of the thesis elements we discussed into an all-encompassing super-thesis. You don’t want a thesis that is overly complex or specific. You also don’t want one that is so broad that it looks like an all-you-can-eat buffet. Focus on a few, well-defined areas that can serve as a good filter and source of discipline while still providing enough freedom to incorporate interesting companies.
Remember that you should have a well diversified 25-company portfolio. If you form a multi-part thesis like Madrona’s, try to cluster several portfolio companies around each thesis to improve your odds of capturing each opportunity.
Talk to other investors.
It’s normal for investors to share ideas and work together, particularly among individual investors where there isn’t competition for a deal. Ask other investors what their thesis is, share yours, and see what you learn. Use the conversations — along with your experience and knowledge — to modify or solidify your thinking.
Have fun developing your thesis!
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About: Mike Cozart
Mike is a senior product leader and angel investor. Mike started his career as an investment banking analyst and venture capital associate before taking on general management and product management roles with Amazon and Axon Enterprise. He earned an MBA from Columbia Business School in New York City, a BA in Economics from The University of Texas at Austin, and a BS in Geographic Information Science from Texas A&M University at Corpus Christi.
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How To Write A Great Investment Thesis
October 26, 2018 — 10:30 am EDT
Written by SeekingAlpha ->
By SA Author Experience :
By Mike Taylor
A Seeking Alpha contributor recently asked in our Contributor forum:
We thought it might be a good idea to share an answer to this question publicly, to give more insight into Seeking Alpha's editorial thought process. As a reminder, an Editor's Pick is an award given by SA editors to articles that stand out in some way.
My response follows.
This is a great question, and I'm excited by the chance to elaborate on the thought process behind Editor's Picks.
I believe strongly in the value of editorial judgment. High-quality articles share some general characteristics, but there is a strong "you know it when you see it" element to a great article.
So, I'm not going to provide an algorithmic set of inputs that systematically yield an Editor's Pick. To be honest, it doesn't exist. And I actually think such a list would defeat the purpose of the tag and the accompanying rewards.
In the general curation process, Seeking Alpha's system is built on specific rules and processes aimed at impartiality and a level playing field. Meanwhile, the Editor's Pick is one area where we openly and explicitly privilege the "spirit of the system" over the "letter of the law." I don't expect that to change soon, for the simple reason that for all my team's natural human flaws, editors are an enormous value add in the article selection process.
Meanwhile, our CEO Eli Hoffmann has said he wants to produce more Editor's Pick caliber content, and I share that objective. Editors have an obligation to help authors who want to improve. And fortunately, there are resources available to authors who aspire to Editor's Picks. I'll do my best to aggregate them here.
1. Working with editors.
I'll first note a correlation. Authors who receive Editor's Picks tend to have strong, often friendly, relationships with editors. There's a chicken-and-egg problem there. Do these authors produce great content, which creates goodwill among editors? Or do they work well with editors, yielding good content? I'll split the difference, and say that authors who get Editor's Picks a) seem intrinsically motivated to aspire to great analysis, which editors notice; and b) actively cultivate relationships with the editorial team.
One of the best things an author can do to improve his or her chances at Editor's Picks is to reach out to the team to say hello, check in, and start a conversation about how to improve their work. Building a one-on-one, collaborative relationship with an editor who "gets you" as an author is another solid approach. It's often most productive to pursue these conversations *outside* the heat of an ongoing article submission. That approach takes longer, but it can be more productive.
2. Learning from our past selections.
We've been tracking the feedback editors give when making their Editor's Pick selections. Here are the recurring patterns/attributes appearing in that feedback, ranked by relative frequency (the most frequent attribute appears first):
- Balance between quantitative and qualitative information (more on what we mean by that here ).
- Undercovered: The security discussed simply does not get a lot of attention, and therefore, the article is of greater potential novelty/value to readers.
- Detailed or comprehensive: Editors discriminate based on depth of research. We favor articles that draw on close readings of primary sources such as SEC filings, court filings, and conference call transcripts; that reflect a comprehensive consultation of credible secondary sources like news reports, press releases, and company presentations; that involve proprietary research - some of our authors visit locations or call experts to validate their findings.
- Industry level: Some of our Editor's Picks go to credible commentary about the goings-on in a particular industry where the author has a strong depth of knowledge, experience, and/or expertise. These pieces usually have strong and specific takeaways for investors.
- Presentation: Some Editor's Picks are very well organized, with strong attention to rhetorical strategy, and the writing is direct and coherent. This is usually a supplementary attribute rather than the primary reason for the award.
- Balanced: Editors appreciate a full look at the available information, including an exploration of data that *doesn't* support the main argument.
- Unique angle: For well-covered stocks especially, editors look very favorably on novel perspectives. We tend to reward authors who can convincingly "zig" while everyone else "zags."
- Update: Strength tends to build on itself (see "Working with editors" above). Editors reward authors who follow up on previous Top Ideas and/or articles that resonated strongly with readers.
3. Looking for helpful online resources.
The Author Experience is aimed at making editors' expectations as transparent and specific as possible. We created a directory of AE articles arranged by topic . I'd consult the articles there, particularly those focused on our approach to the research and analysis processes. " How To Do Investment Research " may be helpful as well.
You can follow the SA Editors' Picks account for a daily list of our selections, delivered to your inbox. If I were an author, I'd look out for articles in my area of research focus for inspiration, and use them as a starting point. I would avoid pure mimicry because at the root of many Editor's Picks is the motivation to share a unique perspective or method.
The CFA Institute Investment Foundations Program is now globally available, free of charge. For those with less investment industry experience, this is a great way to become conversant in the main approaches to research and analysis. I've encouraged everyone on the editorial team to pursue this program, and about half are enrolled or have finished. While the Foundations Program is not the only path to success, it's broadly informative of editors' general perspective.
Of course, if you want to make a very strong commitment to the craft of investment research there's always the CFA Program , which is not free and which is a multi-year commitment. It's not a requirement for the creation of great investment research nor is it a guarantee of great insight, but in my experience, it was a great way to explore the world of investing and build confidence in my own thought processes.
To reiterate, the purpose of this post is not to create an automated Editor's Pick selection process or a set of boxes to check. Instead, it provides editorial guidance based on our experience with authors who are successful, with articles that resonate with us, and with online resources inside and outside SA that we believe to be most helpful.
Thanks for raising this topic, and I look forward to hearing from the community.
See also The Bull Market Is Broken: Time To Protect Your Portfolio on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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How to Write an Investment Thesis in Private Equity
2022 was tough for M&A. Private equity deal volume was 46% lower than the previous year. Venture capital deals were down 42% globally in the first 11 months. And as deal volume slows, dry powder continues to grow, with more than $1 trillion USD in the US alone.
This surplus of cash coupled with a lack of deal flow means firms must change how they do business to succeed in 2023. While the first step is to supplement intermediary deals with a direct sourcing model, economic uncertainty is causing firms to refine their outbound strategies.
Dealmakers must find ways to be highly efficient with their time and search only for the most strategic investments. They must make a strong case for each and every transaction with a clear rationale of why this company should choose their firm amidst stiff competition.
The best way to do that is by carefully crafting an investment thesis and using it to guide your direct deal sourcing efforts. Keep reading to learn more.
What Is an Investment Thesis in Private Equity?
An investment thesis is, quite literally, a thesis statement. It’s succinct, yet comprehensive enough to serve as your firm's guiding principle to both source and secure ideal investments.
Imagine you're back in school and writing a term paper. Remember how a thesis was treated as a single defining statement that guided the development of your entire paper? The same is true of an investment thesis for your private equity firm. Unlike your term paper, however, firms often have more than one thesis because they often focus on multiple types of deals at once.
Dealmakers’ theses can also be broken down into two specific types: top-down and bottom-up. A top-down investment thesis is something that helps your team understand and seek out ideal investment targets when sourcing.
Top-Down Investment Thesis for Venture Capital Example: "This $10MM seed fund focuses on US-based cannabis startups that are furthering the industry through technology and infrastructure research and development that can leverage our partners' vast experience in the logistics and supply chain sectors.”
Once your firm has identified an ideal company that fits its top-down thesis, it’s time to create a bottom-up version. Far more direct and specific in nature, a bottom-up investment thesis includes everything from particular information about the target company — including financial statements and forecasting, future business plans, funding strategy reasoning, industry trends, etc. — as well as why your firm is the best choice.
Bottom-Up Investment Thesis for Private Equity Example: "Smith Partners is seeking to invest a $20MM Series A round in Asclepius, Inc. to aid in their rapid growth and contributions to the advancement of the healthcare industry. Their dedication to modernization combined with SP's vast network of cutting-edge automation manufacturers and forward-thinking healthcare providers make this partnership particularly exciting."
A bottom-up thesis would then continue into specifics about the company, detailing financial and employee records, proprietary knowledge or advantages such as patents, and more about what your firm brings to the transaction. A final bottom-up thesis can take many different forms: e.g., a comprehensive document, presentation, or video.
The key to both a top-down and bottom-up investment thesis is specificity. Every thesis your firm creates should be valid only for your firm . The combination of geographic location, sector or industry, company stage or type, fund size, reasons behind the investment or focus, and your firm's specific differentiators should make each of your theses unique.
Steps for Building an Investment Thesis Framework
Creating an investment thesis framework will help your firm draft theses more quickly and make sure all of the necessary information is included. Answering the following series of questions is a good place to start building a framework for both top-down and bottom-up theses:
- What is the goal of this thesis? This answer takes one of two forms: to find new target investment opportunities or to secure a potential deal. But before you can detail the rest of the thesis, you must know your end goal.
- What are the basic parameters of your ideal deal? Once you have your overall goal, sort out the basics first: overall available capital, company demographics (e.g., location, size, industry), etc.
- What are the influencing internal factors? What is your firm hoping to get from a deal that would fit this thesis? Do you need to bridge a valuation gap in your portfolio, for example?
- What are the influencing external factors? If you've ever gone through a thematic sourcing exercise, this will feel similar. While your thesis should not be nearly as large in scope as a thematic investing strategy, socioeconomic or industry trends can be a driving factor for why your firm is looking at this type of investment and should be called out in your thesis.
- Why your firm? While this is the simplest question, it's not only the most difficult to answer but also the most important. Your differentiator — what only your firm can offer to the industry or target company — and why you are particularly suited to this segment of the market (in a top-down thesis) or specific deal (in a bottom-up thesis) is the key to crafting a successful investment thesis in private equity.
- Why this deal? For a bottom-up thesis, you must detail why this deal should be transacted:
- Why this company? Is it the founder that instills confidence? Do they have intellectual property that makes the deal worthwhile? How are their financials impacting this decision?
- What does the future look like and what are your plans post-transaction?
- What is the eventual exit strategy? When would you plan for that to happen?
- How does this deal impact your portfolio?
The framework you build from answering these questions can then be refined into a single statement or document that serves as your thesis. But be prepared to make iterations. You must continually refine your theses as you gather more data, learn more about your ideal investment, and the world continues to evolve and change.
Putting Your Investment Thesis to Work
Once your firm creates a thesis, it's time to put it to work. Remember that at its most basic level, a thesis aids your team in qualifying opportunities to see if they're worth pursuing.
Inputting the ideal criteria from your top-down thesis into a deal sourcing platform helps you map and understand the wider market, determine the most relevant conferences to attend, directly source the right opportunities, and much more. These tools can also help you learn more about specific target companies, their competitors, their investment readiness, and other key details to craft bottom-up thesis statements.
With over 130,000 sources and millions of data points, SourceScrub’s deal sourcing platform has helped firms improve their research productivity by 42.8% and deal sourcing pipeline by 36%. Let’s chat to find out how we can help you create and execute your investment theses in 2023 and beyond!
Receive more articles like this in your mailbox., similar articles you might be interested in, the top 20 research tools for private equity and venture capital firms, the fastest-growing industries and private companies in the 2023 inc. 5000, sector investing series: fastest-growing travel & hospitality companies, we scrub the data you close the deals.
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S T R E E T OF W A L L S
Building an investment thesis.
Now that you understand what characteristics make up attractive long and short ideas, it is time to explain how to formulate an investment thesis. Being able to construct a real and actionable investment idea is in the heart and soul of an analyst’s work in the hedge fund industry. Building a successful thesis begins with (1) rigorous due diligence at the Micro level, (2) aligning that view with the Macro environment, and (3) understanding the overall trade setup.
Good Company Qualities
- High return on capital
- Barriers to entry
- Growing industry
- High margins relative to competition
- High insider ownership
- Well respected
- Clean accounting
- Infrequent restating of earnings
- Not overly promotional
- Good allocators of capital
All of these qualities are obvious and won’t differentiate your pitch, but they are qualities you will have to talk about, so make sure you understand them well.
Target Price = Your Earnings Estimate × Multiple
- Will the company beat earnings expectiations in the next quarter or in the next year?
- If so, what are the catalysts that will cause the Company to beat earnings (e.g., higher revenue, higher margins, lower interest expense, share buybacks, etc.)? Paint the picture of how, when, and why there will be a catalyst that supports your view. Providing an opinion without fully understanding and explaining the relevant value drivers will be a recipe for failure.
- What’s your confidence the company will beat earnings? What’s the probability?
- What’s your margin of safety? What can go wrong?
- Does your pitch rely on multiple expansion? Why? Where is the company trading relative to its historical multiple? Should the multiple trade at a premium or discount given how the company has changed over the years, and where we are now in the business cycle?
- Where is the company trading relative to its peer group? If the entire market has seen multiple expansion, then is it fair that this company should too? In other words, is it expensive or cheap relative to itself historically and/or its peers, and can you explain why this might be wrong?
- What catalyst is going to cause this multiple to start expanding? Again, paint the picture of how, when, and why there will be a catalyst that supports your view.
- What is your confidence in multiple expansion? What’s the probability?
Your target price is the product of a forecasted earnings metric multiplied by the expected multiple. This multiple can be P/E, EV/EBITDA, EV/Sales, FCF/Market Cap, or any other reasonable metric. Some metrics are industry-specific and more valuable for those industries than the aforementioned general ones.
Regardless, if you provide a target price, you need to explain how you arrived at this target, and the stages of your thought process to get there. for example, if you claim that a stock is going to have +50% upside, but feel they won’t beat consensus earnings, then you are calling for +50% multiple expansion, pure and simple.
Although not ideal, stocks in industries with bleak macroeconomic outlooks can still be good investments. It is important to understand what is taking place at the company level, sub-sector level, industry level, and national level. This approach will help you determine whether you are investing in a “good house in a bad neighborhood.”
- How has the stock performed heading into the catalyst, i.e, before you put the trade on? If it has already gone up 10% recently, for instance, it will be much harder to outperform on the catalyst.
- How crowded is the trade? Are a lot of hedge funds already invested in the name? One easy way to determine this is to speak to a sell-side research analyst and ask whether they are getting a lot of calls from other funds regarding the company.
- Is the general public bullish or bearish? If you are researching a short pitch, it is key to check for existing short interest (SI function on Bloomberg). If it is a long, you should review the list of major holders of the stock (HDS function on Bloomberg). If the top holders are several hedge funds, then the stock pitch is likely overcrowded and may not be actionable. One of the biggest mistakes in a hedge fund interview is to pitch a stock that every hedge fund has already heard of and evaluated.
Crowded names can still work, but investors must tread lightly. When the market sells off or there is a change in sentiment, crowded names typically perform the worst. To check this, there is an index on Bloomberg of high hedge fund ownership stocks; you can use it to see whether your idea is on that list to make sure it isn’t already an overcrowded trade idea.
Other technical tools that can help evaluate the setup for a stock include RSI (relative strength index) and moving averages. The RSI is a momentum indicator—below 30 is considered oversold and above 70 is considered overbought.
Ideally, you want a stock that has recently underperformed its peers, is lightly owned by hedge funds, and is heading into a catalyst that you think will have a positive surprise . By contrast, a crowded name that has already outperformed based on the expectation of a positive catalyst will likely get a limited reaction if and when the catalyst does occur. For example, it is very common for companies to beat earnings expectations but not to experience an increase in their stock prices, because the general public or hedge funds are already expecting the earnings surprise. In today’s hyper-competitive market, one needs a truly different variant perception in order to outperform the market.
Other Investing Thoughts
- What constitutes a good investment idea? What does that phrase even mean? The answer is that it means something different to every person–that is what provides opportunities in a market. That is why some investors own a stock and others short it. If everyone agreed on what makes a good investment then everyone would own the same stocks.
- How much should you make per idea? Investors do not even agree on this principle. Developing frameworks for investing will help you follow a set of guidelines that you can refine over the years through experience, and as part of that, you will learn to determine what the expected profit and acceptable risk for a particular investment are.
Value Investing Framework
- Benjamin Graham defined the first basic tenant of value investing as follows: when the price of a security diverges from its intrinsic value (its corresponding cash flows), a value investor should work to exploit that divergence.
- The second basic tenant of value investing is the margin of safety: a security should preferably be purchased at a deep discount to its intrinsic value, to help limit the amount of downside risk the investment has.
Street of Walls Investing Framework
- It is very easy to get ideas from other investment professionals, but it will be very obvious in your pitch whether you have done the analytic work yourself or not.
- This is typically discovered when you are questioned on your assumptions in the model. If you built the model yourself, you can likely defend the assumptions much more intelligently.
Market size and growth.
Study the market size and growth of the company’s core industry. Even though you may be studying the beverage industry, the manufacturing companies and distribution companies have very different dynamics. The beverage manufacturers may not be growing much faster than CPI, but the distributors may be going through a massive consolidation period and therefore have earnings that are growing at a much faster pace.
Historical Industry Returns
A security may be cheap and look attractive, but that may be because the returns of the company and the industry are not attractive. For example, the stock Owens Corning (OC) traded at 8x earnings for a long time. This sounds inexpensive, but it was ultimately justified because operating margins were in the single digits. Eventually, however, industry did consolidate and operating margins expanded to 20%. Thereafter, the company’s earnings multiple expanded into the low teens.
Most bottom-up, fundamental analysis is used to study the unit economics of a company. For example, what does it cost to make and sell one unit of output, and what is the profit on that unit? What are the pricing and volume trends? It is important to understand the value drivers clearly in order to build a detailed operating model for your pitch.
- Do certain companies control industry pricing?
- How sustainable is the company’s competitive advantage?
- Are there high or low switching costs?
- Does branding matter
- Are there regulatory protections, such as tariffs?
- What important considerations are there with respect to the company’s customers and suppliers?
Cyclical / Seasonal
An industry may be in a strong growth period and look very attractive, but it may also be at the peak of a cycle that is possibly about to turn substantially negative. For example, the housing industry looked extremely attractive in the early 2000s, but crashed and was extremely unattractive into the late 2000s and beyond. This is due to both an economic downturn and a systematic overbuilding of homes that collapsed in the middle of the decade. In addition to the economic/business cycle, certain industries have drivers of cyclicality that are very specific. One example of this is the Oil & Gas industry—the price of oil alone can have a huge impact on a Oil & Gas company’s earnings potential.
It is also important to understand the seasonality of the business. Retailers tend to sell more product during the fourth quarter of the year, because of the holiday shopping season. Therefore, it may be wrong to extrapolate a trend in March and April if the majority of the company’s sales take place in the later months.
When you start working for a hedge fund you will quickly learn that each fund has their own unique investment style. Some hedge funds simply will not invest in companies that have weak management teams. It does not matter how attractive the opportunity or valuation is—the fund simply won’t invest. This principle often results from an investor getting burned from a bad management decision, such as a bad acquisition, or a focus on short-term earnings at the expense of long-term objectives. After gaining experience analyzing companies, you will eventually develop your own philosophy. Still, bear in mind that other investors may have an opinion on this topic that differs from yours, and you need to consider the philosophies of your teammates when evaluating an investment idea.
In studying management teams, you should look at the management team’s track record and understand both the buy-side and sell-side opinion on the management team. Study the company’s internal philosophy: how do they allocate capital? Is the current management team following what the company has always done? Another key to understanding how a management team will probably act is to study how the members are compensated. Is their compensation tied to revenue or earnings, return on capital, or some other metric? How much stock does the management team currently own? How much risk are they taking? Are they buying or selling stock? How many options do they have outstanding?
Study both relative and absolute valuation. A stock may appear cheap when compared to a stock in another sector, but very expensive against its peers. Thus, different investment situations call for different valuation metrics to be used.
One example of this principle is that it is completely unhelpful to use P/E if the company has no earnings (or negative earnings). You should also study the rate of growth of the earnings metric you chose. A company may look expensive at 30x earnings, but if it is doubling revenue every year and tripling earnings, it may not be so expensive after all. In fact, if you believe that this trend can continue, it may be an excellent long investment idea.
- Is there a difference between your earnings estimates and those of the street?
- If not, is your thesis really interesting, or is it just a “consensus trade”?
- What are the key events that the street will care about? Is it an earnings release, a new product release, or something more unusual?
- Does the street care about what happens next quarter or are they more focused on the potential signing of a big contract that could take place at any time?
Donald Rumsfeld once said there are “Known unknowns and unknown unknowns.” Some risks are riskier than others. How does the company control for this? How do you as the investor assess the downside risk from this?
- What has to happen for the downside case to play out?
- What has to happen in order to lose some benchmark amount, say 20% or more?
- If that event plays out, what will happen to the multiple? Will it go down or actually expand?
- All in all, what is the probability of a downside event and what is the maximum potential loss you might face in such a scenario?
Catalysts are extremely important in identifying when you are going to “get paid.” This is a crucial factor in sizing positions. If a catalyst is expected to take place in the near future, you probably want to have your position fully sized immediately. If not, it may make sense to taper into a position.
Framework for Investing: Large Market Movements
Rising Markets: The typical reaction to a rising stock price is to “chase” the returns. That means when a stock continuously goes up, day after day, the investor feels like he or she is missing an opportunity, and will be inclined to buy the stock. This pile-on mentality causes more investors to become a part of the action. This is a classic, human reaction to a strongly outperforming stock, and it can often lead to poor returns due to an undisciplined approach and the fickle nature of the market.
The same thing can happen when a stock continues to drop in price. Investors tend to panic and sell at exactly the worst time. During the heat of the battle, people tend to get emotional and sell their best stocks out of fear.
- Tell yourself it is normal to react this way when you are losing a lot of money. Fear is normal: both the fear of missing an opportunity and the fear of continuing to lose more money.
- Ask yourself, “Has my investment thesis changed?” If it has, then sell, but if it has not, then ignore your fears and hold the position.
- Have strict target prices in place. This will help you exit a position once your target has been achieved, and thereby avoid the trap of trying to “ride a winner.”
Here is a related excerpt written by Benjamin Graham, from The Intelligent Investor:
- “Imagine that in some private business you own a small share that costs you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects, as you know them. Often, on the other hand, the value he proposes seems to you a little short of silly.
- If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.”
The liquidity of a single stock is not a reason for a fundamental investor to buy a stock, but it can definitely be a reason for an investor not to buy a stock. The less liquid a stock is, the riskier the position becomes, as it is difficult to exit an illiquid position—especially during turbulent market conditions, when liquidity is often demanded.
In order to determine how liquid a stock is, you need to see how many shares trade on a regular basis. For example, if the average daily volume of a $10 stock is 1 million shares, then the stock trades $10 million per day. If you have a $1 million hedge fund, and you want to take a 10% position, you will need to buy $100,000 worth of stock, or 10,000 shares. If you wanted to buy all of that stock in 1 day you could, as you would only account for 1% of the daily volume ($100,000 in stock to be purchased ÷ $10,000,000 daily volume = 1%). A reasonable rule of thumb is that you do not want to account for more than 10-15% of a stock’s daily trading volume if you do not want to influence its price. So in this example, you could buy up to $1,500,000 worth of stock per day without moving the share price. If you were to buy $2,000,000 of stock in 1 day, or 20% of the daily volume, you would likely cause the stock price to increase (at least temporarily). If your desired position is much larger, then it could take many days to accumulate the desired position – and similarly, it could take a long time to unwind the position when you want to exit. This makes the investment much more risky.
Therefore, a stock may have fantastic management, excellent earnings growth, and an attractive price, but if there is no liquidity you probably simply cannot buy it.
You may think that you have found a gem: a rare and precious investment opportunity that no other hedge fund is talking about. Fortunately, that notion is relatively easy to confirm or disprove. To check and see whether other sophisticated investors are involved in the company you’re researching, you can pull up the company’s quarterly holdings report on Bloomberg and see who the largest shareholders are.
For example, suppose that W.R. Grace (GRA) offers an exciting investment opportunity, according to your analysis. However, looking at the holders list, you determine that other hedge funds are well aware of this opportunity, as the top shareholders include large hedge funds such as Lone Pine, York Capital, TPG Axon, and Hound Partners.
It may not be a bad thing that other hedge funds are involved. You will probably be invested in a good company in this case, as large hedge funds rarely get involved in unsound investment ideas. That being said, crowded trades can, again, be very risky. First, if the market is already anticipating good news, it may be that the good news is already baked into the stock price. Second, if bad news comes out, then everyone will likely be forced to run for the exits at the same time. This will lead to adverse price movement that could destroy your holding.
Hedge funds in general tend to be short-term focused, so it could turn into a situation where one investor exits swiftly and triggers a domino-effect panic, crushing other investors in the wake.
Looking at charts can be very deceiving and can create misleading signals. For example, the stock chart below shows a quickly rising stock price, but that does not mean it is expensive. It may be cheap relative to its own history, the rest of the sector, or the market as a whole. The entire stock market might have been going up rapidly, or the sector as a whole might have had a big rally, and relative to the sector the stock underperformed, so it may actually be cheap on a relative basis.
You may also want to compare several valuation metrics simultaneously. For example, a company may look expensive on a Price/Earnings basis but cheap on an EV/EBITDA basis.
In the graph below, you can see that Factset Research Systems (FDS) is trading at 20x P/E. Relative to the market that is high, but relative to its own history, that is a normal trading ratio.
Business Model Questions
It is just as important to understand the industry in which a company operates as it is to understand the company itself. For example, if you are studying a homebuilder, it is important to understand the companies the homebuilders buy supplies from. If the building products companies are raising their prices and the homebuilder cannot raise prices, the builders are going to see their margins compress. Therefore, it is important to scan what is happening with related companies across the industry and sector to get a sense of the overall dynamic affecting the company’s earnings potential.
Homebuilding Industry: Related Participants
- Building Materials – USG, EXP, VMC, SHW
- Home Builders – LEN, DHI, KBH
- Building Products – WHR, MAS
- Furniture – TPX, LZB, ETH
- Extensions – Lawn care – SMG
- Mortgage Originator – BAC, C
- Insurance Provider – PRU, MET
A change by the mortgage originator will likely have an impact on the entire industry. If Bank of America (BAC) tightens its origination standards, then people will buy fewer homes; homebuilders will buy less carpet to go inside the homes; fewer beds will be sold; etc. Therefore, before considering an investment in a homebuilder or related entity, it would behoove you to perform checks to see what else is occurring in related industries and sectors across the value chain.
Business Model Advantages
Barriers to entry.
Companies with barriers to entry have a huge advantage relative to companies that do not. These barriers can occur for a variety of reasons, but some of the most common include economies of scale, substantial investment requirements, technological innovation, favorable government regulation, and networking effects. eBay, for example, is an extremely difficult company to compete against, because the company has established a formidable position as the largest Internet-based auction site available. Both buyers and sellers are unlikely to go to other sites, because both realize that eBay offers more individuals on the other side of the aisle to transact with. This makes it hard for new auction companies to compete with eBay effectively.
Companies in most industries will claim that they have high barriers to entry, but time will often show that a company earning significantly higher than its cost of capital will attract competitors. Put simply, if the company is earning outsized returns on the capital it invests, then it will attract competitor investment seeking to earn comparable returns. This competitive investment will result in increased production and sales competition, and diminished profit-earning potential will surely follow in the future.
The low-cost producer can have a huge advantage over its competition. In industries with large legacy assets, such as cement or coal production, the players with the newest assets are typically the lowest cost providers, and that allows for lower pricing often results in greater market share.
Alternatively, there is also a learning curve that can create the reverse effect, wherein the older industry participants have lower costs as the newer players are still “figuring it out.”
Repeat purchase items, such as paper or office supplies, can create a strong advantage for the producer. The more entrenched companies become within their customer bases, the higher the switching costs for those customers. For example, a large technology roll-out may effectively lock a customer in to the provider’s products, as it costs too much to execute a complete technology overhaul to switch to a different vendor.
Economies of Scale
Companies with large fixed costs need scale in order to make a profit. The larger the fixed costs, the larger the scale needs to be. Incremental margins can be very high once a company crosses a certain threshold and is able to sufficiently leverage its cost base. This can make a company highly attractive and cause a company to trade at a high multiple, once the threshold production level has been achieved. This phenomenon is sometimes referred to as “operating leverage.”
Oligopolies, or Monopolistic Competition
Functioning oligopolies can act similar to monopolies, in terms of locking in outsized profit margins from its business. These situations should not take place for long according to basic economic theory, but they can and quite often do. For example, the roofing industry has greatly consolidated in recent years, so that four players currently control 80% of the roofing shingle manufacturing market. When one of the four manufacturers raises its prices, the other three can easily follow. For the past five years, none of the players has broken from the pack and tried to steal market share from the other three by offering a lower price. As a result, the industry has seen its operating margins grow from 8% to 20% in recent years. Whether this increase in margin is sustainable over the long term remains to be seen.
What is a “good” return for a portfolio? How do you know? What is a good return for an individual investment?
The Academic Approach
Expected Rate of Return = Risk-free return + Beta × (Expected Market Return – Risk-free return)
This is the equation from the Capital Asset Pricing Model (CAPM), which you will learn in school—but try pitching this to a portfolio manager at a hedge fund. He or she will likely tell you to get lost!
Theoretically this makes perfect sense, but most hedge funds don’t use this as a hurdle rate. Most funds target a 20% return—though very few are capable of actually achieving that return consistently.
The Practical Hedge Fund Approach
A more practical approach is to study what percentage of the time you will make money and lose money on your investments. From there, you need to understand how much you make when you are right and how much you lose when you are wrong. Here is an example of this framework:
As you can see:
Average Return per Idea = (% Right × Avg. Return When Right) + (% Wrong × Avg. Loss When Wrong)
% Right is often referred to as your “Hit Rate,” and Average Return When Right is often referred to as your “Slugging Rate.” The magnitude of your wins relative to that of your losses is referred to as your “Win/Loss Ratio.”
The best analysts are right about 60% of the time. Most people think they will be right closer to 75%, but the sad truth is that most investors will not do much better than 50%. You can still make money being right only 50% of the time, but you have to be very disciplined about cutting your losses. That is why maintaining a 2-to-1 Win/Loss ratio is so important.
Here is what is so troubling about the example given above: a fantastic analyst who is right 60% of the time, makes a 30% return when right, and maintains a 2-to-1 Win/Loss ratio, will only earn an average return of 12% per idea. However, as we noted, most hedge funds try to earn 20%, so how can they do this?
One possible solution is to employ leverage, but from an analyst’s perspective, he/she typically does not have control over this. So how can an analyst generate a higher return per idea?
A higher Hit Rate is very difficult to achieve. Also, achieving greater than a 2-to-1 Win/Loss ratio is also not realistic, as it would require tighter stop-loss controls that may result in the premature exit of lucrative investments simply because they took an initial “hit” before panning out.
Therefore the only real area to control is the Slugging Rate. If this is the lever, then the analyst cannot afford to invest in stocks that will only earn 10%, 20%, or even 30%. It is just not a high enough annualized return. At a 40% Slugging Rate, the analyst can get closer to the elusive 20% total return hurdle.
40% thus tends to be a “sweet spot” for many hedge fund analysts, as a minimum hurdle rate of return for putting on a position. If the investment only has a 6-month duration, then the return only needs to be 20%, which is roughly 40% on an annualized basis.
Searching for 40% Returns
What needs to happen in order for a stock price to increase? Either earnings need to expand, or the multiple needs to expand, or a combination of the two. The first step is to look at where the sell-side estimates are for the current year and two years into the future. If AAPL is trading at $611 today and is expected to earn $54 in 2013 and $63 in 2014, it is trading at 11x P/E and 10x P/E in 2013 and 2014. In order for the stock to reach $855, or 40% higher, you might project earnings to be 20% higher than the street in 2013 at ~$65, and for the multiple to expand by 20% to ~13x. Or, you might predict stronger earnings growth and less multiple expansion, or vice versa.
As you can see, it pays to think through different scenarios needed to achieve your target return.
A common mistake analysts make is to say that they believe a stock will appreciate by an amount but have earnings expectations that equal or are very similar to those of sell-side earnings estimates. That means that for the investment thesis to prove correct, the stock must increase entirely due to multiple expansion. That is generally viewed as a “low-quality” thesis, as expansion in a valuation multiple is more difficult to predict and gain confidence in than is growth in earnings.
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What is an investment thesis?
Any successful business starts with a clear mission statement. Same goes for investing. When choosing an asset to put your cash into, you need to have a clear investment objective, also known as an investment thesis.
An investment thesis definition is as follows: analysis performed to evaluate the potential purchase of an asset , based on a set of investment criteria. In simpler terms, it is the belief that investors rely on when deciding which investments to buy or sell and how to treat them afterwards. It serves as a guide that you initially establish, helping to guide further investment decisions. An investment thesis determines which initiatives an investor should participate in and which are better to avoid. This analysis helps you to set your investment goals. A good investment thesis can be the basis for a profitable portfolio , while a misguided investment thesis can lead to weak gains or even losses.
What you need to know about an investment thesis...
The main goal of an investment thesis is to turn an abstract concept into a functional investment strategy. It helps investors to assess possible investment ideas, guiding them through the options to choose the most suitable ones. Just as markets continuously evolving, the ideas, techniques and strategies implemented by investment professionals do not stand still. In the past few decades, portfolio management has become a more science-based discipline, which considers developments and breakthroughs in basic theory, technology and market structure, resulting in improvements in professional practices. Therefore, the modern investment thesis is usually significantly backed up by quantitative and qualitative methods.
Typically, a savvy seller will get ahead of the process by preparing the investment thesis for the buyer by himself. As an example, even before a letter of intent is issued, private equity firms usually develop an investment thesis for every potential acquisition. It is usually done by presenting the future strategy of the company and its plans for the expansion and diversification of its services and products. The aim is to show potential buyers that the company knows how to generate high returns for its shareholders. An investment thesis is typically done in a written form as a document or slide presentation. It is then presented to the buyer's investment committee to achieve deal approval. It gives the seller the opportunity to communicate the rationale behind the transaction.
Although an investment thesis is generally considered formal in nature, there are no universal standards to be applied when writing up the document. It can vary depending on the given situation. Some investment opportunities come with little time to take advantage, and therefore professionals have to act as fast as possible. In other scenarios, when it comes to bigger, global trends, an investment thesis may be well documented to include all the minutiae and specifications.
Remember that the principles of successful investing are quite simple. The hard part is to adhere to your initial plan through the ups and downs of the market. In this sense, an investment thesis can become your anchor, guiding you through the hardships.
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- Questions about Expos?
- Writing Support for Instructors
One of the most common questions we receive at the Writing Center is “what am I supposed to do in my conclusion?” This is a difficult question to answer because there’s no one right answer to what belongs in a conclusion. How you conclude your paper will depend on where you started—and where you traveled. It will also depend on the conventions and expectations of the discipline in which you are writing. For example, while the conclusion to a STEM paper could focus on questions for further study, the conclusion of a literature paper could include a quotation from your central text that can now be understood differently in light of what has been discussed in the paper. You should consult your instructor about expectations for conclusions in a particular discipline.
With that in mind, here are some general guidelines you might find helpful to use as you think about your conclusion.
Begin with the “what”
In a short paper—even a research paper—you don’t need to provide an exhaustive summary as part of your conclusion. But you do need to make some kind of transition between your final body paragraph and your concluding paragraph. This may come in the form of a few sentences of summary. Or it may come in the form of a sentence that brings your readers back to your thesis or main idea and reminds your readers where you began and how far you have traveled.
So, for example, in a paper about the relationship between ADHD and rejection sensitivity, Vanessa Roser begins by introducing readers to the fact that researchers have studied the relationship between the two conditions and then provides her explanation of that relationship. Here’s her thesis: “While socialization may indeed be an important factor in RS, I argue that individuals with ADHD may also possess a neurological predisposition to RS that is exacerbated by the differing executive and emotional regulation characteristic of ADHD.”
In her final paragraph, Roser reminds us of where she started by echoing her thesis: “This literature demonstrates that, as with many other conditions, ADHD and RS share a delicately intertwined pattern of neurological similarities that is rooted in the innate biology of an individual’s mind, a connection that cannot be explained in full by the behavioral mediation hypothesis.”
Highlight the “so what”
At the beginning of your paper, you explain to your readers what’s at stake—why they should care about the argument you’re making. In your conclusion, you can bring readers back to those stakes by reminding them why your argument is important in the first place. You can also draft a few sentences that put those stakes into a new or broader context.
In the conclusion to her paper about ADHD and RS, Roser echoes the stakes she established in her introduction—that research into connections between ADHD and RS has led to contradictory results, raising questions about the “behavioral mediation hypothesis.”
She writes, “as with many other conditions, ADHD and RS share a delicately intertwined pattern of neurological similarities that is rooted in the innate biology of an individual’s mind, a connection that cannot be explained in full by the behavioral mediation hypothesis.”
Leave your readers with the “now what”
After the “what” and the “so what,” you should leave your reader with some final thoughts. If you have written a strong introduction, your readers will know why you have been arguing what you have been arguing—and why they should care. And if you’ve made a good case for your thesis, then your readers should be in a position to see things in a new way, understand new questions, or be ready for something that they weren’t ready for before they read your paper.
In her conclusion, Roser offers two “now what” statements. First, she explains that it is important to recognize that the flawed behavioral mediation hypothesis “seems to place a degree of fault on the individual. It implies that individuals with ADHD must have elicited such frequent or intense rejection by virtue of their inadequate social skills, erasing the possibility that they may simply possess a natural sensitivity to emotion.” She then highlights the broader implications for treatment of people with ADHD, noting that recognizing the actual connection between rejection sensitivity and ADHD “has profound implications for understanding how individuals with ADHD might best be treated in educational settings, by counselors, family, peers, or even society as a whole.”
To find your own “now what” for your essay’s conclusion, try asking yourself these questions:
- What can my readers now understand, see in a new light, or grapple with that they would not have understood in the same way before reading my paper? Are we a step closer to understanding a larger phenomenon or to understanding why what was at stake is so important?
- What questions can I now raise that would not have made sense at the beginning of my paper? Questions for further research? Other ways that this topic could be approached?
- Are there other applications for my research? Could my questions be asked about different data in a different context? Could I use my methods to answer a different question?
- What action should be taken in light of this argument? What action do I predict will be taken or could lead to a solution?
- What larger context might my argument be a part of?
What to avoid in your conclusion
- a complete restatement of all that you have said in your paper.
- a substantial counterargument that you do not have space to refute; you should introduce counterarguments before your conclusion.
- an apology for what you have not said. If you need to explain the scope of your paper, you should do this sooner—but don’t apologize for what you have not discussed in your paper.
- fake transitions like “in conclusion” that are followed by sentences that aren’t actually conclusions. (“In conclusion, I have now demonstrated that my thesis is correct.”)
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Hillenbrand: Remaining On The Sidelines
- Hillenbrand has seen good revenue growth driven by strong demand and recent acquisitions, but organic growth is expected to slow down.
- Organic Backlog for both segments has been sequentially decreasing, indicating a potential slowdown in organic revenue growth in the coming quarters.
- The upcoming acquisition of Schenck FPM business will increase the company's leverage and limit the potential for inorganic growth.
I last covered Hillenbrand ( NYSE: HI ) with a neutral rating in March this year. The stock has remained flattish since then validating my stance. Looking forward, while the valuations are cheap, I see headwinds to the company's performance due to a sequential decline in backlog in both the segments. Further, the company's net leverage will increase beyond management's target range of 1.7x-2.7x post the upcoming acquisition of Schenck's FPM business limiting the potential for inorganic growth. Margin outlook is also mixed given the tough macros which might impact pricing. I would prefer to wait on the sidelines for fundamentals to bottom before taking a more positive stance on the stock. For now, I have a neutral rating despite the cheap valuation.
Revenue Analysis and Outlook
Hillenbrand has seen good growth over the last couple of years driven by strong demand in its end markets. In the third quarter of FY23 , the Company posted a solid 24% Y/Y increase in total revenues from continuing operations (i.e. ex Batesville). This performance was driven by 5% Y/Y organic growth as well as contribution from recent acquisitions. Segment Wise APS (Advanced Process Solutions) segment posted a remarkable 50% Y/Y growth driven by acquisitions, favorable pricing and strong aftermarket parts and services revenue. On an organic basis the growth in this segment was 14% Y/Y. On the other hand, MTS segment's revenue declined 7% Y/Y primarily due to lower injection molding and hot runner equipment sales, partially offset by growth in aftermarket parts and services revenue, as well as favorable pricing.
Hillenbrand Revenue (Company Data, GS Analytics Research)
Looking forward, I expect the company's revenue growth to slow. A company's backlog is the leading indicator of its revenues and its organic backlog for both segments has been decreasing sequentially for the last couple of quarters.
Hillenbrand Backlog (Company Data, GS Analytics Research)
The Company is seeing a prolonged customer decision process and delay in awards of projects due to macroeconomic uncertainty. It is not unusual for clients to delay projects for several quarters during an uncertain macroeconomic environment and given the prevailing high interest rate environment, I won’t be surprised if many of them are re-accessing the return profile of their investments.
Further, management noted that the Chinese market, which showed some initial strength post Chinese new year has slowed down since then. China is an important market for the company and Hillenbrand derived ~20% of its net revenue from this market in FY22. A slowdown in this market is a negative for the company.
So far, the pricing has held up and helped Hillenbrand's revenue. However, given the slowdown in end-market demand, there is a possibility of increased competition which might put some pressure on pricing as well.
Hillenbrand has benefited from inorganic growth in recent years. The company recently announced acquisition of Schenck's Food and Performance Materials (FPM) business which is expected to be completed by the end of this quarter. This should help revenues. However, post the completion of this acquisition the company's leverage will increase to ~3.2x which would be higher than management’s 1.7x to 2.7x target net leverage ratio. So, I expect a near to medium term pause in M&As post this acquisition.
Overall, I expect a moderation in both organic and inorganic growth over the coming quarters.
Margin Analysis and Outlook
Hillenbrand demonstrated good margin performance in Q3 FY23 and its adjusted EBITDA margin improved by 20 bps, reaching 17.6%. The company's margin benefitted from effective pricing strategies, heightened productivity and increased volumes in APS (Advanced Process Solutions) segment which were partially offset by the impact of cost inflation and lower MTS (molding Technology Solutions) segment volumes.
Segment wise, APS segment's adjusted EBITDA margins improved by 60 bps to 20.1% driven by favorable pricing, operating leverage from higher volumes, and enhanced productivity which were partially offset by cost inflation and dilutive effect stemming from recent acquisitions. MTS segment's adjusted EBITDA margin was stable around 20.2% despite lower volumes thanks to the company's effort to manage cost and drive productivity.
Hillenbrand Segment EBITDA Margins (Company Data, GS Analytics Research)
Looking forward, the company's margin outlook is mixed. On the one hand, the company is doing a good job managing costs and improving productivity and realizing synergy savings from the recent acquisitions. On the other hand, tough macroeconomic conditions and declining backlog may put pressure on volumes and pricing going forward which might negatively impact margins. Further, the acquisition of Schenck Food and Performance Material business should negatively impact the margins in the near term as it has lower margins compared to Hillenbrand's APS segment. Eventually, after the company realizes synergy benefits, margins should see some improvement in the medium to long term. However, for the next few quarters, this acquisition should be dilutive to the margins. So, I am not optimistic about the company’s near term margin prospects.
Valuation and Conclusion
Hillenbrand is trading at 12.58x FY24 (ending Sep.) consensus EPS estimates. This is less than its 5-year average forward P/E of 13.20x. The company's revenue has posted a good growth in the recent period helped by acquisitions as well as organic growth. However, if we look at the declining organic backlog and softening demand as customers delay projects due to macroeconomic uncertainties, the organic growth is expected to slow down. Further, I am not expecting much inorganic growth post the completion of the recently announced acquisition of Schenck FPM business as the company's net leverage will increase to ~3.2x post the acquisition which will be higher than the management's target range. So, I am not optimistic about the company's revenue growth prospects. Further, margins outlook is also mixed with the company's productivity and cost saving initiatives helping but upcoming revenue slowdown as well as lower margins of recent acquisitions being a headwind. I would like to wait on the side lines for fundamentals to bottom. Hence, I have a neutral rating on the stock despite low valuation.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This article is written by Saloni V.
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