Equity Research

What is Equity Research?

Equity Research primarily means analyzing the company’s financials, perform ratio analysis, forecast the financial in excel (financial modeling), and explore scenarios with the objective of making BUY/SELL stock investment recommendation. Equity Research analyst discusses their research and analysis in their equity research reports.

In this in-depth article on Equity Research, we discuss the nuts and bolts of Equity Research

• Role of Equity Research
• Hierarchy in Equity Research firms
• Role of Head of Research
• Job of the Senior Analyst
• Responsibilities of an Associate
• Responsibilities of a Junior Analyst
• Typical Day at an Equity Research Firm
• Who pays for Equity Research?
• Equity Research Professional Approach
• Equity Research Skills-Set
• Top Equity Research Firms
• Equity Research Compensation
• Equity Research Exit Opportunities

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Equity Research explanation is quite simple. Let us look at these steps below

1. Equity research is all about finding the valuation of a listed company (Listed companies trade on a stock exchange like NYSE or NASDAQ etc
2. Once you have the company under consideration, you look at the economic aspects like GDP, growth rates, the market size of the industry and the competition aspects, etc.
3. Once you understand the economics behind the business perform the financial statement analysis of the historical balance sheet, cash flows and income statement to form an opinion on how the company did in the past.
4. Based on management’s expectation, historical performances and industry competition, project the financial statements like the BS, IS and CFs of the company.  (also called as Financial Modeling in Equity Research)
5. Use the Equity valuation models like DCF, Relative valuations, sum of parts valuation the company
6. Calculate the Fair price based on the above models and compare the fair price with the Current Market Price (stock exchange)
7. If the Fair Price < Current Market Price, then the company stocks are overvalued and should be recommended as a SELL.
8. If the Fair Price > Current Market Price, then the company shares are undervalued and should be recommended as a BUY.

Role of Equity Research

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• Equity Research plays a very critical role that fills the information gap between the buyers and sellers of shares.
• The reason is that at all levels (individual or institutional) may not have the resources or the capabilities to analyze every stock.
• Additionally, full information is not provided by the management due to which further in-efficiencies are created and stocks trade below or above the fair value.
• Equity Research analyst spends a lot of time, energy and expertise to analyze stocks, follow the news, talking to the management and provide an estimate of stock valuations.
• Also, equity research tries to identify the value stocks out of the massive ocean of stocks and help the buyers to generate profits.

What is the Typical hierarchy in Equity Research firms?

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• A typical hierarchy at an Equity Research firm starts with the Head of Equities/Head of Equities at the top.
• Thereafter there are Analysts (senior) covering different sectors. Each analyst mostly covers around 10-15 companies in a specific sector.
• Each Senior analyst may be supported by an Associate, who in turn may be supported by a couple of Junior Analysts.

What is the role of Head of Research?

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• Head of Research acts as a key member to manage the Equity research analyst team, providing the team with leadership, coaching, and guidance to ensure that the brokerage goals and objectives are met.
• They oversee research reports publications, it’s editing as well as monitor the process of analysis and brokerage recommendations
• They ensure that adequate support is provided to sales and trading teams
• Contribute to Equities by providing expert-level inputs for overall strategy, goals, initiatives, and budgets
• Responsible for Analyst hiring, compensation, development and performance management
• Liaison with fund managers and the research teams.

What is the job of the Senior Analyst?

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Below is an excerpt from a job requirement of a Senior analyst –

source – FederatedInvestor

• Typically an equity research senior analyst would cover a sector with not more than 8-15 stocks. Coverage implies tracking these stocks actively. Senior Analyst tries to bring maximum companies under coverage in the sector he/she tracks (initiating the coverage)
• Many senior equity analysts cover companies that investors may want to invest in. These companies are like the high market capitalization companies or the ones with higher trading volume and there could also be cases where investors want to invest in small-cap or mid-cap stock companies with fewer analysts coverage.
• One of the most important responsibilities of Senior Analyst is to come up with Quarterly Results Update – results summary, expectation, and performance against those expectations, updating forecasts, etc.
• Talking to the clients (buy side) and showcasing their calls on the stocks. They have to diligently communicate buy sell recommendations of stocks. Additionally, they have to articulate clearly why a certain stock should be included in their portfolio.
• Write important industry event updates like conferences or management meeting updates
• To update the Sales team, dealing with and trading team about the latest news in the sector and the company and keep them updated with the brokerage’s view on the same.
• Attending conference calls for important company updates, results, etc
• Attend trade shows, meet company management, suppliers meetings, etc

Responsibilities of an Associate

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Below is the summary of Associate job description from efinancialcareers

• The primary job of an associate is to support the Senior Analyst in the best way possible.
• An associate has prior experience of around 3 years or so in a similar industry.
• Updating the financial model, verifying the data and preparing the valuation models
• Working on various client requests like a request of data, industry analysis, etc
• Prepare draft Equity Research Reports (update of results, events, etc)
• Work on client requests
• Participate in meetings and calls with clients on the stock under coverage.

Responsibilities of a Junior Analyst

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Here is a snapshot of Junior Equity Analyst’s responsibilities.

source – careers.societegenerale.com

• The main responsibilities of Junior Analyst are to support the Associate in every format.
• Majority of the work done by Junior Analyst is related to data and excel etc
• Also, Junior Analyst may be involved in doing primary research, industry research, coordinating with clients, etc
• Maintaining the industry database, charts, graphs, and financial models,etc.

Typical Day at an Equity Research Firm

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Previously, I had worked with companies like JPMorgan and CLSA India as an Equity Research Analyst. I covered Indian Oil & Gas sectors with stocks like ONGC, BPCL, HPCL, GAIL, etc.  Below was my typical day as an Equity Research Analyst.

7:00 am – Reach office

• Check emails from traders and salespeople
• Check the stock markets (Asian Markets that open first)
• Check for all the news related to your sector

• Morning meeting is nothing a formal discussion of the recommendations before the market opens along with Sales & Trading Team
• In this morning meeting, all analysts present their views on key developments in their sector along with the Head of Research or Equities presenting their views on the general markets.

• Follow the Market, look for key developments in your sector
• Try to rationalize if there are any rapid stock price movements

• Perform regular research analyst duties like Client Requests, Financial Model updates,
• Follow the News and keep a close check

• Discussion with buy side clients for any explanation of research/calls
• Continue doing your regular maintenance work

• Capture the market movements of the company under coverage for the day closure.
• Check if there is anything that the clients should know and work accordingly.

• Work on the new research piece for publication (next day or in coming days)
• Generally, research analyst targets at least 1 to 2 research pieces every week.

• If there is no earning season (company results), then the typical go home time is 7:30-8:00 pm. However, during earning seasons there is no surety when you will reach home.
• You need to fully prepare the result update report and keep it ready for next day early morning publication.

Who pays for Equity Research?

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• For Independent Equity Research firms: Independent equity research firms do not have a trading and sales division. They perform financial analysis with an idea of charging Fees on a per report basis. Also, see Equity Research vs Sales and Trading
• For Major Equity Research firms: Fee income is earned by brokerage trades (Soft Dollars). To understand this in detail, let us look at the diagram below –

• As noted above, on one side is the Buy Side firms like Hedge Funds, Pension Funds, Insurance Companies, Mutual funds, etc.
• On the other side are the sell side firms like JPMorgan, Goldman Sacks, Credit Suisse, etc.
• The buy side firms manage the portfolio and they are required to invest their portfolio as per the investment objective.
• Investment objective may mandate these companies to keep a portion of their assets in Stocks etc.
• In such cases, the buy side analysts seek to advise from the sell side analyst for investment decisions.
• The advice or the idea provided by the sell side analyst is literally for FREE.
• Once the buy side analyst has taken the decision of investing in the stock, the buy side analyst may look forward to executing the trade through the Trading division of the sell side firm
• The trading division will in turn charge a commission for executing the trade at the lowest price.
• The commission in return is basically the earnings of the research firms.

Equity Research Professional Approach

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So what is your work like as an Equity Research Professional? Equity Research analysts follow stocks and make recommendations on whether to buy, sell, or hold those securities using Fundamental Analysis. Equity Research is a very challenging job, where an analyst may be required to spend more than 12-14 hours a day.

For creating a professional Equity Research Financial model, an expert analyst recommended approach is as follows –

Economic Analysis / Industry Analysis / Company Analysis

• The very first thing you need to take care of while doing a professional analysis is to learn about the economic parameters affecting the industry, the industry dynamics, competitors, etc.
• For example, when you are analyzing Alibaba, you should know about each and every subdivision of Alibaba and its competitors.

Fundamental Analysis

• You should be awesome at Fundamental Analysis. Fundamental Analysis means performing a Ratio Analysis of the company under consideration.
• Before you start ratio analysis, you should populate at least the last 5 years of financial statements (Income Statement, Balance Sheet and Cash Flows) in excel.
• You should prepare a blank excel sheet with Separate Income Statement, Balance Sheet and Cash Flows and use neat formats
• Populate the historical financial statements (IS, BS, CF) and do the necessary adjustment for Non-recurring items (one time expenses or gains).
  Do the Ratio Analysis for Historical years
• An example is presented below in Colgate Ratio Analysis

Preparing a Professional Financial Model

• Company management does not provide the future financial projections of the company. Therefore, it is important as a research analyst to project this data. Forecasting the financials of the company is known as Financial Modeling. I earlier wrote a 6000 words step-by-step tutorial on Financial Modeling. If you want to master Financial Modeling, you can refer to this Financial Modeling Tutorial

Valuations – DCF

• Valuation is primarily done using two methods – a) Discounted Cash flow and b)Relative Valuations.

Once your financial model is ready, you can perform Discounted cash flows as given in the steps below –

• Calculate FCFF as discussed in class and the handbook
  Apply a suitable WACC post the calculation of the capital structure
  Find the Enterprise Value of the Firm (including the Terminal Value)
  Find Equity Value of the Firm after the deduction of Net Debt
  Divide Equity Value of the Firm by the total number of shares to arrive at the “Intrinsic Fair Value” of the company.
  Recommend whether to “BUY” or “SELL”

Valuation – Relative Valuations

• Relative valuation is based on comparing the valuation of the company under consideration with the valuation of other firms. There are valuation multiples used to value companies like PE Multiple, EV/EBITDA, PBV ratio, etc.

The common approach is given below.

• Identify the comparable based on the business, Market Capitalization, and other filters
• Identify a suitable trading valuation multiple to be used for this business.
• Use the average valuation multiple to find the valuation of the company
• Suggest “Undervalued” or “Over-valued”.

 

Research Report

• Once you have prepared the financial modeling and find the fair valuation of the company, you need to communicate this to your clients through Research Reports. This research report is very professional in nature and is prepared with a lot of caution.
• Below is a sample of the Equity Research Report. You may learn about Equity Research Report Writing here.https://www.wallstreetmojo.com/wp-content/uploads/2015/03/Reliance-Petroleum.pdf

Equity Research Skills-set

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 Here are an excerpts from the Equity Research Job Requirements Description –

Key highlights to note from this excerpt is –

• MBA is a plus (not a necessity). If you are an MBA then you have certain advantages, but if you are a graduate, you should not get disheartened. You have a chance if you prove your interest in finance. Please do have a look at Can an engineer get into an Investment Bank
• Financial discipline is not essential, but you must have a strong interest in the financial markets with excellent quantitative and analytical skills.

• You should be fluent in English and have excellent verbal and written communication skills.
• You possess intellectual curiosity, focus, and creativity, and have a keen research instinct with creative problem-solving abilities.
• Strong proficiency in Microsoft Excel and Powerpoint
• CFA designation – This is one important designation that the finance industry respects. Try to ensure that you take the CFA examination and pass at least a couple of levels.

I wrote a detailed post on the skills required to enter into Equity Research. My top 5 skillsets required to enter the Equity Research Industry are –

1. Excel Skills
2. Financial Modeling
3. Valuations
4. Accounting
5. Report Writing

You can get an in-depth understanding of the skillsets here – Equity Research Skills

Top Equity Research Firms

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Institutional Investors ranking suggests that in 2014, the best research firm was Merril Lynch Bank of America, second place was taken by JPMorgan and Morgan Stanley came third.

Apart from the top 3 above, there are other notable equity research firms (listed below)

Deutsche Bank	Standard Chartered Bank
Credit Suisse	Cornerstone Macro
UBS	Wolfe Research
Barclays	BNP Paribas Securities
Citi	CIMB Securities
Nomura	Cowen and Co.
Goldman, Sachs & Co.	Berenberg Bank
CLSA Asia-Pacific Markets	Citic Securities
Wells Fargo Securities	CRT Capital Group
VTB Capital	Empirical Research Partners
Sberbank CIB	J. Safra Corretora
Santander	Keefe, Bruyette & Woods
ISI Group	Kempen & Co.
Daiwa Capital Markets	Otkritie Capital
Jefferies & Co.	Raymond James & Associates
Mizuho Securities Group	Renaissance Macro Research
SMBC Nikko Securities	SEB Enskilda
Macquarie Securities	ABG Sundal Collier
HSBC	Amherst Securities Group
Banco Português de Investimento	Antique Stock Broking
Batlivala & Karani Securities India	Autonomous Research
BBVA	Helvea
BGC Partners	Ichiyoshi Research Institute
BMO Capital Markets Corp.	ICICI Securities
BOCI Research	ING Financial Markets
Brasil Plural	Intermonte
Commerzbank Corporates & Markets	JB Capital Markets
Davy	Kepler Capital Markets
EFG-Hermes	LarrainVial Corredora de Bolsa
Equita S.I.M.	Lazard Capital Markets
Fidentiis Equities	MainFirst Bank
Gazprombank	N+1 Equities
Goodbody Stockbrokers	Oddo Securities
Guggenheim Securities	Okasan Securities Co.
Handelsbanken Capital Markets	Oppenheimer & Co.
Samsung Securities	Petercam
Stifel	Rabobank
Strategas Research Partners	Redburn Partners
UniCredit	Washington Analysis
Vontobel	Zelman & Associates

Equity Research Compensation

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• Junior Analyst/Assistants have a base comp of $45,000 – $50,000 per year (average)
• Associates have a base salary of $65,000 – $90,000 per year (average) depending on the experience. Additionally, they get a bonus of 50-100% of the base salary (in an average to good year)
• Senior Analysts generally have a base compensation of $125,000 – $250,000. Their bonus may range from 2-5 times the base compensation.

Equity Research Exit Opportunities

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Sell Side research analyst has various Career Opportunities –

Within Equity Research Firm

• If you joined as an associate, then you can move up the ladder to become a Senior analyst assuming full responsibility for the sector coverage.
• Later you can move further up to become Head of Research and Head of Equities.

Private Equity Analyst

• Sell side analysts also move to Private Equity domain working as Private Equity Analyst.
• Instead of analyzing public companies, they analyst private companies from the point of view of investments.
• They can move up the hierarchy to become a Private Equity Fund manager. Check out the list of Top Private Equity Firms

Investment Banking Analysts

• Movement of sell side analysts to Investment banking is slightly tough but not impossible.
• Sell side analysts are fully aware of financial research and modeling related work.
• What they haven’t worked on is the transaction-related work like IPO filing documents, Pitch books, registration work, etc. If you are confused between Investment Banking and Equity Research, read this article – Investment Banking vs Equity Research

Buy Side Firms

• Sell side analysts sometimes are also absorbed as buy side analysts (working for Mutual funds etc).
• The buy side analysts assume the responsibility of fund managers over a period of time.

Corporate Finance

• Sell side analyst work a lot on financial analysis, analyzing company projects and its effect on the overall company’s financials. Hence, they get into typical Corporate finance roles of large corporates (take care of financial analysis, planning Projects, etc)
• Another unique role they get into is Investor relations. As a sell side analyst, they get equipped with the FAQs and how to deal with critical information and its sharing, etc. Due to this they also become eligible for Investor Relations jobs.

Another useful article –

• Equity Research Interview Questions

Conclusion

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Equity Research essentially means preparing an estimate of company fair valuation for recommending the buy side clients. Though, as a research analyst, you may spend 12-16 hours a day at the office, however, this is a dream job for many who love Finance and Financial Analysis. If you like to work in a challenging and dynamic environment, then this is one career you must consider. Not only equity research job rewards analysts with relatively higher compensation, but also, it provides excellent exit opportunities.

Equity Research Video

What next?

If you learned something new or enjoyed the post, please leave a comment below. Let me know what you think. Many thanks and take care. Happy Learning!