Recommended Preparation

It is hard to find a “mispriced” stock – as there is a lot of money chasing that! This is a difficult project, and we evaluate the presentations with that in mind. Included below are the questions that we often ask. Successful teams historically have answered a these questions well:

Background research & questions to answer

  • Stock chart over last 10, 5, 2 years vs. the market – Why has the stock over or underperformed?
  • P/E or EV/EBITDA multiple over the last 10, 5, 2 years
    • What as the multiple done (expanded, contracted, stayed the same) over the last couple of years? What company or industry specific factors could be causing those changes? How do the changes compare to peers?
  • Has the company grown earnings over the last 10, 5, 2 years? By how much? What do consensus estimates suggest how much EBITDA and EPS should grow this year? Over the next few years?
  • Has this company beat or missed earnings the last few years/quarters? Did the stock react negatively or positively to those releases? What do you think drove the reaction?
  • On the last earnings call transcript, on what did analyst questions focus? Analyst questions often represent what investors are watching or are skeptical of. What questions addressed the core trajectory of fundamentals in the business (i.e. are things getting better or worse in the industry in general and the company specifically)? Did management response seem to adequately address this?
  • In the 10-K management discussion and analysis:
    • What industry does the company compete in? Who are its peers? What does management believe the company’s competitive advantages or differentiating factors are? Do these seem reasonable?
  • What are the factors driving your revenue assumptions? Are your revenue growth assumptions more or less bullish than consensus and why?
  • How does the company’s growth compare to what’s expected in the industry? Are they gaining or losing market share?
  • Do you expect margins to expand or contract this year and next? What is driving that assumption (Price growth? Input cost changes? Other factors?)
  • Bringing together your revenue and margin assumptions, what EPS and EBITDA can the company generate this year? Next year? How does that compare to current consensus estimates? (i.e. if you are pitching a long, you should be ahead of consensus; if short, probably below)
  • What are two or three company specific or industry catalysts that could cause the market to better understand and price this stock? When will these occur? How will this manifest themselves in numbers?
  • Why isn’t the market correctly valuing these catalysts? What does the market not understand?
  • What are people in the industry saying about these catalysts and this company?
  • What do you expect the company to say on the next earnings call? How will the stock likely react to this?

Telling the story

  • We see X% upside/downside to company XYZ over the next x months
  • Three catalysts which will drive that & what the market doesn’t understand
  • Company description
  • Industry overview
  • Catalyst 1
  • Catalyst 2
  • Catalyst 3
  • Earnings assumptions vs. consensus – why different?
  • Valuation (comps – EV/EBITDA, P/E vs. peers, DCF)
  • Risks/mitigating factors
  • Final recommendation

Recommend Resources

  • Investor Relation Website – Earnings Press Releases, Call Transcripts/Webcasts, Company Investor Presentations
  • gov – Company Filings (10-Ks and 10-Qs)
  • Bloomberg – Company and Industry News, Equity Research Reports, Peer Group, Financials

What Securities Are Allowed?

Stocks are to come from the universe of companies with market capitalizations above $500 million and share prices above $2 as of the close of regular trading today. Selections must be a stock (common or preferred), including ADRs and GDRs. ETFs, ETNs, Closed-End Funds, and other exchange-traded securities, including derivatives (options/futures) and currencies, are not eligible for the competition. We are interested in participants’ ability to select and evaluate companies, not their ability to evaluate sectors, trends, or managers. Additionally, equities must have a three month average daily volume of at least 100,000 shares (as of the close today) and must trade on the NASDAQ, NYSE, or NYSE AMEX (no OTCBB or PinkSheets). The opportunity will be evaluated as a long or short position with a three to twelve month investment horizon.