InvestInU Academy – Stock Pitch Guide Stephane Renevier

Reda Farran
www.investinu.academy Add us on LinkedIn!

Structuring a stock pitch

A well-structured, well-researched, convincing stock pitch is made up of six key parts:
1. Recommendation
2. Company background
3. Investment thesis
4. Catalysts
5. Valuation
6. Risks
Below, we’ll elaborate a lot more on each as well as provide an illustration for each using a
hypothetical long Apple stock pitch example (highlighted in blue).

Part 1: Recommendation
 Name of the company + buy / sell its stock + price target
 While a recommendation to “hold” is common in the industry (especially among sell-side
equity analysts), you should never do that in a stock interview – it’s not actionable and
shows little conviction
 Also, a “sell” rating is more like “avoid this stock”, especially for a long-only investment firms
o If you genuinely think a particular stock is overvalued and heading lower, you should
pitch it as a “short” i.e. betting on the stock price falling – that shows a lot more
conviction
o But if you’re interviewing at a long-only firm, then it obviously doesn’t make much
sense to pitch a short idea (they can’t act on it)
 The last part of the recommendation is your expected price target i.e. what you think the
stock is worth
o This price target doesn’t have to be from a very detailed valuation model, it can be
from a simple valuation framework as long as there’s some sound logic behind it
(you’ll get to explain your valuation in more detail later on in the stock pitch)
o It might be worth mentioning what upside or downside % is implied by your price
target based on the stock’s current price
 Example recommendation
o Long (i.e. buy) Apple with a $400 price target, implying 30% upside from Apple’s
current stock price

Part 2: Company background

 What does it do + how does it make money?
o If a company has multiple products, make sure you identify which ones are most
important; that is, which ones contribute the most to sales and profit
o The “how does it make money” question might sound simple, but it’s a very
important one and affects how you look at and value the stock
o Take for example a software company: Does it sell its software in one-off licenses or
under a software-as-a-service (SaaS) model? The latter generates recurring and
more predictable revenue, and a company with this selling model should be valued
at a higher multiple than a company with non-recurring and less predictable license
sales.
 In this part, you should also give some background on the company’s industry: Growing / flat
/ declining? Cyclical or defensive? Level of competition + the company’s main competitors.
 o Is the company in a growing, flat, or declining industry? Note that just because it’s in
a growing industry, that doesn’t mean the stock is a buy because you have to take
into consideration the competition
o For example, think about the ride-hailing market that Uber operates in: it’s a fast
growing market but the growth has attracted lots of competition who are all
engaged in a price war, hurting Uber’s profitability
o Likewise, just because a company is in a declining industry, that doesn’t mean it’s a
sell. In fact, value investors often look for overly beaten-up stocks in declining
industries to invest in.
o So you can use that kind of thinking to find out of consensus buys and shorts
o Sometimes it’s worth mentioning if the company is in a cyclical industry or a
defensive one, especially if your stock pitch is based on some macro view i.e. you’ve
taken a top-down approach to form your stock pitch
o E.g. pitching a defensive company as a long / a cyclical company as a short if all
economic indicators say we’re in late cycle and you think a recession is around the
corner
o Something else worth mentioning when talking about the overall industry is who the
company’s main competitors are and what’s the level of competition like
 The last thing you should talk about under company background is the stock’s current
valuation multiples
o What P/E, EV/EBITDA, P/B, etc is the stock currently trading on? (Pick the multiple
that makes the most sense for that kind of company)
o How do those multiples compare to the stock’s history? To its peers?
o You can find all this data from sites such as Yahoo Finance or, for US stocks, Koyfin
and Atom Finance
 Example company background
o Apple is a tech company that sells hardware such as smartphones (iPhone),
computers (Mac) and tablets (iPad). The company also sells services ranging from
apps to cloud storage, as well as subscriptions for music, magazines, video
streaming, video games, and more.
o More than half of the company’s revenue comes from iPhone sales but its second-
largest revenue category, services, is growing fast and currently represents almost
20% of revenue
o The smartphone industry is a mature one, with sales mainly driven by the
replacement cycle. Apple’s main competitors in the smartphone market are
Samsung, Huawei and Xiaomi. The last 2 (Huawei and Xiaomi) compete on price,
whereas the main differentiating factor between Samsung’s flagship smartphones
and iPhones is operating system (Android vs. iOS). Most users tend to stick to the
same operating system when replacing their smartphones. Apple’s services segment
mainly competes with Google (operating systems, app store sales, cloud storage,
etc).
o Apple’s stock trades at 25x P/E, higher than its 5-year average of 17x but lower than
peers at 30x

Part 3: Investment thesis

 Your investment thesis is your three key reasons behind your recommendation to buy or
sell the stock
 This is the MOST IMPORTANT part of the stock pitch
o The first 2 parts (recommendation, company background) set the scene / are the
appetisers, the investment thesis is the proper meat of the pitch / the main meal
 You have a lot of freedom here and there’s no exact three points we can tell you to cover,
but we give you some guidance and ideas below
 One of the thesis points should always mention the consensus's view on the stock and,
ideally, how your own view is different
o For example, if most sell-side analysts think a company’s new product is going to be
a failure but you have an educated view on why it’s actually going to be a success,
then that’s a very strong thesis point for a buy recommendation
o The key thing here is you’re pointing out something that everyone else has missed
or misunderstood about the company
o How do you find out what consensus is thinking? For starters, you can check the
websites we mentioned before (Yahoo Finance, Atom Finance, Koyfin) to see the
number of buy / hold / sell recommendations on a particular stock as well as
analysts’ average price target. This gives you a sense of whether sell-side analysts
are generally bullish or bearish on a stock.
o Then, ideally, you can try to get your hands on actual sell-side research reports if you
know someone in the industry with access to a Bloomberg terminal. If not, then you
can try to search online.
o For US stocks, go to www.thefly.com and enter the ticker in the search bar. This
gives you key historical news for the stock which includes analyst upgrades,
downgrades, and initiations. The best part is that the website provides a one
paragraph summary of the analyst action (i.e. why the analyst upgraded /
downgraded the stock), and this is a nice little trick to see summaries of analyst
reports on particular stocks.
 If you’re pitching a company as a buy because it’s in a high-growth industry, then one of
your investment thesis points should be about why the company can defend or even grow
its market share in the face of competition
o This is referred to as an economic moat, which refers to a business's ability to
maintain competitive advantages in order to protect its long-term profits and
market share from competing firms
o Some examples of economic moats include a strong and well-recognised brand
name such as Coca-Cola, intellectual property protected by patents, having a
significant cost advantage, etc
o Economic moats are important because a high growth industry with juicy profits will
always attract competition who’d want a piece of the pie. So something else to
potentially address here are any potential barriers to entry in that particular
industry.
o Massive capital investment is an example of a barrier to entry. Boeing and Airbus
dominate the airplane market, and it’s very hard for a new competitor to show up
because of the massive amounts of capital investment needed to set up airplane
manufacturing plants. Also, these companies have a lot of intellectual property on
how to manufacture great airplanes, and this is also hard for a new entrant to copy.
 Lack of any economic moats can be an investment thesis point for a short recommendation
o For example, imagine you come across a very overvalued stock because it’s growing
sales at a crazy speed. But if your research shows that heavy competition is going to
enter the industry soon and the company has no economic moats to protect itself,
then the stock’s valuation multiple can de-rate significantly when investors start to
see cracks in its growth story.
 Big valuation disconnects can also be strong investment thesis points
o This could be based on the company trading at multiples well below peers, or at a
deep discount to its value based on a discounted cash flow (DCF) model
 o It could be other things too. Imagine a struggling retailer that owns the actual land
and properties of where it operates. If you do the math and find out that the value
of its properties is actually higher than the stock’s current market cap, then that’s a
valuation disconnect that can be exploited even if the retailer’s business operations
are struggling.
 A very attractive risk-reward ratio can also be a good thesis point
o For example, if you’re pitching a company as a buy, then one of your thesis points
can be that if you’re right about the company’s mispricing, the stock can go up by
50%. But if you’re wrong, then the downside is capped because the company would
most likely be acquired by a competitor or a private equity firm.
o Put another way, you are showing that there’s an asymmetric risk profile i.e. higher
potential gains than potential losses, and that’s always a strong thesis point
 A changing business model can also be an investment thesis point
o For example, a hardware company that’s slowly turning into a software company
would not only increase its profit margins, but it could also justify a higher valuation
multiple if its sales come from more recurring and predictable software sales than
lumpy hardware sales
 A common short thesis point is financial statement shenanigans
o So a company that’s recognizing revenue too aggressively, exaggerating its
commodity reserves, playing games with capitalized vs. expensed costs, etc
 There are other things you can build a short thesis on such as an unsustainable debt burden,
the company’s product being a short-term fad, the company’s whole business model is
about to be disrupted due to technology, etc
o But you cannot build a short thesis purely on the stock being expensive – that’s
never enough reason on its own to short a stock, and expensive stocks can stay
expensive for very long periods of time
 Example investment thesis
o The market is bearish on Apple’s stock because iPhone sales – Apple’s biggest source
of revenue – have started to decline due to smartphone market saturation and
increasing competition from Chinese challengers Huawei and Xiaomi.
o But Apple is incorrectly being viewed by the market as just a hardware company
selling smartphones. In fact, Apple is slowly transforming itself into a software /
services company selling 1) services such as digital content (e.g. apps) and cloud
storage; and 2) subscriptions for music, magazines, video streaming, video games,
and more. And because there are over 1.4 billion iOS devices in active use
worldwide, Apple has a huge captive market to increasingly sell services to.
o As Apple transitions its revenue mix from hardware to software, its stock price
should go up for two reasons: 1) Higher earnings due to expanding profit margins.
That’s because Apple’s gross profit margin on services is double its gross profit
margin on hardware. 2) Its stock should trade at a higher P/E ratio. That’s because
companies with recurring, predictable subscription revenue trade at higher
valuation multiples than companies with bulky, less-predictable hardware sales.

Part 4: Catalysts
 Catalysts are certain key events within the next 6-18 months that would make your
investment thesis play out, make the market realise the stock’s mispricing, and ultimately
make your investment recommendation work
 As the saying goes, stocks can stay mispriced forever if the market doesn’t realise it
 Examples of catalysts include: a new product launch, clinical trial result, potential acquisition
of the company, spinning off a particular business segment, a potential short squeeze,
 massive share buybacks, a new competitor entering the market, IPO lock-up period
expiration, etc
 Don’t pick or talk about catalysts that are very far out in the future e.g. 3-4 years away
o Not only is something that far away very uncertain, but most investment firms won’t
be keen for a recommendation that won’t work for another 3-4 years
 Catalysts can be very important for some stock pitches and less so for others
o Catalysts are essential when pitching a short idea because overvalued companies
tend to stay overvalued until a specific event, such as an earnings report far below
expectations, suddenly makes everyone come to their senses. Also, if you’re short a
stock with no catalysts, then the stock price can keep on grinding higher until you
eventually get wiped out.
o On the other hand, a high-quality, steadily-growing, and fairly-valued company could
see its share price gradually increase over time with no specific catalysts (we call
these kinds of stocks “long-term compounders”)
 Example catalyst
o Apple’s upcoming investor day in 7 months, the first one it ever holds, will be the
catalyst that helps the market see this hardware to services transition. That’s
because I expect the company to stop reporting how many iPhones it sells every
quarter. Instead, it will introduce a new metric centred on the average services /
subscription revenue per user that it generates. I expect Apple to make this new
metric its key performance driver and to tie management’s compensation to it.

Part 5: Valuation
 What is the stock worth and how did you arrive at this number?
 Do not do a long and overly complicated valuation model – a simple valuation framework is
fine as long as it makes sense in two ways: the valuation method chosen is appropriate, and
your assumptions are sensible
 On valuation method, some are better suited than others depending on the company and
circumstances
o For example, a utility stock that pays a steady dividend might logically be valued
using a dividend discount model
o Or take a new company with no earnings or cash flow yet. Then a discounted cash
flow (DCF) or a P/E ratio might not be appropriate here – instead you might have to
look at EV-to-sales multiples
 On assumptions, you have to make sure they’re sensible
o For example, don’t use a perpetual growth rate higher than 3% in a DCF. Don’t apply
a 30x P/E multiple to a company if all its peers trade at 10x.
o Make sure you can justify your assumptions. So if you’re valuing a company using
10x EV-to-EBITDA while most of its peers trade at 8x, then explain why you’re
assigning a premium multiple. This could be because the company’s EBITDA is
growing faster than peers. Or perhaps the company has much better EBITDA-to-FCF
(free cash flow) conversion i.e. it generates more FCF from a dollar of EBITDA vs. its
peers.
 In any case, it’s always good to compare the stock’s valuation to the valuation of its peers as
a sanity-check
o Also, just because a stock trades at a discount to its peers, that does not
automatically make it a buy. What if the stock has always traded at a discount
because it’s a lower-quality business?
 In some cases it might be worth doing a scenario analysis especially if there’s a binary event
involved
 o For example, a pharmaceutical company that is pending approval of a key new
product. What’s the stock worth if that product is approved and what’s it worth if it
isn’t? This helps you better quantify risk-reward ratios.
o If you’re pitching a buy recommendation on an undervalued distressed company,
then what’s the stock worth in a scenario where the company goes bankrupt? That
is, what’s the equity worth if the company had to liquidate all its assets and pay off
all its liabilities.
 Lastly, if there’s a big outlier in the company’s capital structure e.g. it’s sitting on a massive
cash pile, then make sure you factor that into your valuation
 Example valuation
o I have 2-year price target for Apple’s stock of around $480. This is based on two
main things:
o Apple’s total revenue grows slowly (~2% p.a. over the next two years) as declining
iPhone sales is partially offset by increasing services sales. But I expect the changing
revenue mix towards more services to increase Apple’s net income margin from 21%
last year to 25% in two years’ time, implying $16 earnings-per-share (EPS) in two
years’ time.
o I expect Apple’s P/E multiple to re-rate from 25x currently to 30x in two years’ time,
bringing its valuation multiple more in-line with other services / software peers who
trade at an average P/E multiple of 30x
o 30x P/E on $16 EPS = $480 in two years’ time or $400 today (discounted at 10%
p.a.), implying 30% upside from Apple’s current stock price

Part 6: Risks
 What could go wrong at the company level that would cause the stock to move in the
opposite direction to your recommendation?
 Investing is all about risk management, and if you haven’t thought about the risks in your
stock pitch, then you’re not demonstrating that you’re a proper investor
 What could go wrong that would cause the stock to move in the opposite direction?
o Focus on company-specific things and not on general risks such as the entire stock
market going in the opposite direction of your recommendation. Yes that’s a risk but
that’ll impact all stocks, not just yours alone.
o If you’re struggling to think of anything, don’t forget that companies actually list
their biggest risk factors in their annual reports and you can use that as a starting
point to find risks when you’re pitching a buy
 In this section, you should also cross-examine your investment thesis and point out all the
flaws and reasons why it might be wrong
o E.g. if one of your thesis points was about how you have a different view to
consensus, then what if consensus actually turns out to be right
 You should also think about risks of catalysts going the wrong way or never materialising
o E.g. if one of your catalysts is that the company is going to launch a successful
product, what if the product gets scrapped and is never launched? Or if what if it
launches and is a complete flop i.e. does very poorly?
 It’s not enough to just talk about risk factors, but you should talk about ways to mitigate
your losses should those risks materialise.
o For example, one way to hedge a short is by buying out of the money call options.
That way if the stock shoots up for some reason (e.g. gets acquired), then you can
limit your losses.
o Another example is opposing positions in sector ETFs or competitors. Let’s say
you’re pitching an oil company as a buy: one of the risks you face is a big fall in the
 oil price that would negatively impact all oil companies. To hedge against this, you
can short an ETF that tracks the performance of a basket of oil companies.
 Example risks
o 1) Because Apple manufactures a lot of its products in China, one of the big risks
with being long Apple is the US going ahead with their proposed, steep tariffs on
products manufactured in China
 One way to mitigate this risk is to short a basket stocks of Chinese hardware
manufacturers who are major suppliers to Apple. That way if the US does go
ahead with the tariffs, I’d expect Apple’s stock to go down but I’d expect the
stocks of its hardware suppliers to go down even more (because Apple is
one if their largest, most concentrated customers), offsetting some or all of
the losses.
o 2) There’s a risk that Apple cannot transform itself into a software / services
company, and in that case my entire investment thesis will break down
 There’s nothing to mitigate here because this is a slow-moving change as
opposed to a big event / outcome that would massively move the stock in a
single day. The best way to mitigate this risk is to constantly retest my
investment thesis and to sell the stock if I see that Apple’s transformation is
not materialising as planned (e.g. if services revenue is flat or declining for
two consecutive quarters).
o 3) There’s a risk that my expected catalyst, Apple changing its key performance
metrics in its upcoming investor day, won’t materialise
 There’s nothing to mitigate here because not many in the market are
expecting this change i.e. the stock won’t gap down if Apple doesn’t
announce what I expect it to announce. Also, if it doesn’t announce the key
performance metric changes in this investor day, it could perhaps announce
them at a later investor day and in that case the catalyst is just delayed.