How to approach a stock pitch

In this article, Daniel LEE (ESSEC Business School, Global Bachelor in Business Administration (GBBA) – 2023-2027) explains how to approach a stock pitch.

Introduction

Are you preparing for an interview for investment banking? Hedge fund? Or just participating in a finance competition? Learning how to realize a stock pitch is one of the most useful skills you can develop early in your career.

A stock pitch combines fundamental analysis, strategy, valuation skills and even communication. The goal of this article is to break down the process of a stock pitch that anyone can apply.

What is a stock pitch?

A stock pitch is a recommendation (Buy, Hold or Sell) on a stock supported by:

A lot of research on the company and the industry to better understand the context
Financial analysis and valuation
Investment logic

A stock pitch is structured almost every time the same way.

1. Business Overview

Here the goal is to understand the company and some of the key questions are: What is the business model? What are the revenue drivers? Is the company competitive?

2. Industry Overview

In order to put a context into the company, you will have to study key metrics like market size & growth; competitive landscape; barriers to entry and industry trends

3. Investment Thesis

Investment thesis (generally 3) are the reasons why an investor should follow your recommendation? The thesis must be backed up by evidence and specific points. Just saying “the company is a leading player in the industry” doesn’t work. A strong investment thesis should be based on management guidance and analyst’s consensus. For ex: “The company plans to deleverage by x billion $”

4. Valuation

Valuation is probably the most difficult and the core of the pitch. It is here that you must justify that the stock is undervalued/overvalued. Usually (because exceptions exist depending on the industry or the company and you have to pay attention to that!) you use a relative valuation and an intrinsic valuation.

Relative valuation is comparing your company to its competitors to have a better idea of the multiples implied in the industry. Most used metrics are EV/EBITDA; P/E or EV/EBIT. Again, some metrics could change depending on the company or industry it is really important to understand that 2 pitches won’t be the same. The choice of the comps is also very important, and every company should be justified based on specific criteria. For example, a company that makes apple, you won’t compare it to a company that produces oil.

The intrinsic valuation is the Discounted Cash Flow which forecasts the company’s performance over the next 5 years. You typically forecast revenue growth, margins or working capital needs. The DCF is highly sensitive to the assumptions you made so it is very important to do the research work before starting the valuation. In order to consider some errors or unexpected events usually people do sensitivity analysis to Perpetual Growth Rate and WACC but also a Bull & Bear analysis. These analyses show that your pitch is robust and not based on unrealistic assumptions.

Finally, with all these elements you arrive at a final price. For example, with a 50-50 weight between the trading comps (25$) and DCF (30$) > (25+30)/2 = 27.5$ will be your final share price.

5. Risks & Catalysts

This last part is here to balance between optimism and realistic downside scenarios. Considering these elements is very important. A good stock pitch is not buying recommendation with a 100% upside, a good stock pitch is an objective view on a stock including business risks.

What I learned from my previous experiences?

Working on a few stock pitches taught me several lessons:

Keep the pitch simple and structured: a 15-20 slides deck is enough and do not make things complicated
Your thesis must be defensible: It is great to have a huge upside, but you have to explain your numbers, your assumptions and your model
Use Capital IQ: at ESSEC, students have a free account with Capital IQ, very useful to gather financial data!
Tell a story: Incorporating a story is essential to make a good impression and keep the public’s attention to your presentation.

Conclusion

To conclude, a stock pitch is one of the most accessible exercises for anyone who wants to learn financial modelling skills or how to understand a business from a 360° perspective. Moreover, it is always useful to have a stock pitch ready for an interview as it is a question that comes up often.

Useful resources

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A. (2023) Corporate Finance: Theory and Practice.

CFA Research Challenge

Damodaran, A. (2012) Investment Valuation: Tools and Techniques for Determining the Value of Any Asset..

About the author

In this article, Daniel LEE (ESSEC Business School, Global Bachelor in Business Administration (GBBA) – 2023-2027).

▶ Read all articles by Daniel LEE.