…And, we’re back. No, I haven’t forgotten about this series and the long-awaited Part 4 – that’s what today is for.
Over the past few months, we’ve covered everything that goes into a hedge fund case study, from the market research to the financial modeling and valuation and even the top mistakes to avoid.
If you missed any of that, check out Parts 1, 2, and 3 right here.
So, what’s missing?
An actual example that puts everything together for you and shows you how to apply all these concepts.
So I’m going to walk you through a detailed sample stock pitch for Mylan [MYL], a generics pharmaceutical company, right here.
This will NOT be a “perfect” example because I intentionally included a few questionable assumptions and claims – but it will teach you how to get 80-90% of this correct and the key points to emphasize in your own stock pitches.
Notes and Disclaimers:
This stock pitch is based on the 3-part interview series I did with Numi a few months ago, but he has not reviewed this and this is not his idea or pitch because he’s super-busy with work.
Also, this is NOT “investment advice” – it is simply a tutorial on how to structure your own pitches and how to prepare yourself for an extended discussion in an interview.
(Although, the stock of this company has increased over 11% since I first researched and wrote this pitch – I can claim credit for that, right?)
This idea is taken from a free tutorial series on the DCF that we did a few months ago, so if you signed up for that some of this will be familiar.
The Template, the Tutorial, and the Video
Here’s the actual template in Word and PDF format, and the video tutorial below with the text version of the video below that:
As always, I recommend viewing this in 720p (oh, and subscribing to the M&I / BIWS YouTube channel).
Table of Contents:
- 0:00: Introduction, Notes, and Disclaimers
- 2:13: Overall Structure
- 3:49: Recommendation
- 6:10: Company Background
- 7:08: Investment Thesis
- 10:48: Catalysts
- 15:00: Valuation
- 17:43: Investment Risks
- 21:37: The Worst Case Scenario
- 23:26: Recap, Summary & Next Steps
Section by Section
Before even looking at this explanation, make sure you’ve already read all 3 parts of the hedge fund case study series:
- Part 1 – Hedge Fund Case Study Overview
- Part 2 – How to Generate Investment Ideas and Research and Structure Your Case Study
- Part 3 – How to Model and Value Companies and Deals for Use in Your Case Studies
Section 1 – Recommendation
Notice how we immediately state the company, its current share price (NOT its share price right now – what it was when this pitch was written), our recommendation, and the 3 key reasons for that recommendation:
- Undervalued by 10-20%
- Market has overemphasized price competition and the decline in one of its segments (EpiPen), but it makes a relatively small difference if you look at the numbers
- More upside than expected from its recently announced Agila acquisition
A fourth reason is that even if our revenue estimates for the company’s other segments are off, there’s still some upside in the stock – but that is almost more of a “risk factor and how to mitigate it” type of point.
We also briefly mention the catalysts and risk factors in this section, but do not go into much detail on them – that’s what the separate sections below are for.
Section 2 – Company Background
Resist the temptation to go overboard in this section.
This is NOT like a banking book or CIM where you go into tons of detail on the company’s history, current businesses, etc. – instead, you want to highlight:
- Briefly, what they do.
- Revenue, EBITDA, and key multiples (or equivalents if those metrics are not meaningful in the industry this company is in).
- If applicable, revenue or operating income by segment. Here, it is applicable because Mylan has 2 major segments (3 with the acquisition) and one is growing a small amount while the other is projected to decline. So it is worthwhile to track these separately.
Yes, I decided to be annoying and paste in a price-volume chart there as well, but you don’t have to do that.
Section 3 – Investment Thesis
In this section, you want to make the following 3 points:
- Current Market Perception – Here’s how the market currently views this company… and as a result, here is where it trades. So in this example, MYL is viewed as a fairly standard company in its market and trades in the middle of the pack as a result.
- But the Market is Wrong – This is where you give your 2-3 supporting reasons to explain why the market is wrong about this company. Here, our reasons are: 1) There’s more upside to the Agila acquisition than the market has priced in because our channel checks indicate higher-than-expected demand in Brazil, and it’s a tough market to penetrate due to regulations (and they already have a foothold there); 2) The decline of the specialty segment only makes a difference of $0.50 – $1.00 per share, so it matters far less than most have been saying; and 3) Even with lower-than-expected generics revenue growth rates, there’s still 10% upside potential – plus, new product launches such as Xeloda could reduce the risk of this happening.
- And This Error Will Impact the Stock Price – Here, we cited numbers from our valuation to show this – but it’s worth noting once again at the end. Of course, no one knows that a revenue growth decline of 1% or 2% or whatever it is will reduce a company’s stock price by $1.00 or $1.50 per share – but the point is to show that you’ve thought about what might happen.
At the end, we also point out that even if we’re wrong about one or all of these points, then the company would be close to correctly valued at its current price (which reduces our risk).
So before we even get to the risk factors section, we’re addressing that in advance.
Section 4 – Catalysts
The main catalyst is the close of the Agila acquisition, projected to happen in Q4 of the year.
We go through a bunch of sensitivity tables from the DCF and show how this acquisition might potentially add $7.00 to the company’s share price, and then explain why we think growth will be higher than expected – due to our own research and conversations with people in one of the company’s key markets.
Of course, it’s questionable whether or not that difference will account for a growth rate as high as what we have assumed here. That is something that could use more support if you were to present this in real life.
The second catalyst here – the first earnings call post-transaction – is more of a “follow-up” to the first one about the acquisition actually closing.
The last section here, about the company’s new product launches in the coming year, is not directly related to the valuation because we never built in an option to include or exclude the impact of these products in this analysis.
So it’s more of an indirect argument where we say, “Well, this brand could be worth $700 million over these next few years… and here’s how revenue growth affects the output of our analysis.”
Again, if you have the time to come up with better numbers or support, sure, go and do it – here, since our main argument is related to the acquisition closing, we’re not bothering to do that.
Toward the end, we summarize the impact of all of these by estimating what the company might be worth if everything happens vs. if only one or two of these catalysts happen.
- Picking something too general – if it’s not company-specific, it’s probably not good to list unless you can relate it to the company.
- Using the wrong time frame – beyond 12 months is usually too far out. So if you cite a highly speculative event here, make sure there’s some chance of it happening in the next year.
- Not tying it to the per share impact – you can’t always do this, of course, but whenever possible you should estimate the per share impact of events like acquisitions, new product launches, and so on, as we have done here.
Section 5 – Valuation
This part is more difficult to comment on without going through the entire analysis. But, long story short, here is what we did here:
- Created a relatively simple DCF that allowed for the Agila acquisition to be switched on or off and funded by debt or cash;
- Allowed for different revenue growth rates and margins to drive the model, and then created sensitivity tables for many of the key variables.
You might notice the lack of comparables and transactions – that is intentional here, because this stock pitch was part of another tutorial / webinar where we did not have time to cover those.
In a real case study / stock pitch, you would include all of those. If you are pressed for time and cannot possibly gather the data, one “shortcut” strategy is to take some information from equity research or at least find a list of transactions there.
No, you don’t want to rely on research for ideas, but data is data… and if they’ve already done the work for you, you might as well leverage it.
The overall structure:
- Assumptions – Mostly for the DCF, but you’d include these for the other methodologies as well, if you had them.
- Sensitivities and Key Takeaways – What does your analysis say about the company’s value across different assumptions? Here, for example, one important point is that even in more pessimistic scenarios for margins and growth rates, the company would only be valued at a 15% discount to its current price.
One problem with this section is that, as always, the analysis is highly sensitive to the discount rate (among other assumptions) and we haven’t explained how it was calculated here.
That would generate questions in a real interview setting.
Section 6 – Risk Factors
Now the fun part. What could cause this recommendation to go sideways and make us completely wrong?
With any type of recommendation based on acquisition or partnership closing, the first risk factor is simple: what if it doesn’t close?
Other risk factors here are also directly related to the catalysts: emerging markets growing more slowly than expected, resulting in lower growth rates for Agila, and the company’s new products not living up to expectations and bringing down revenue growth as a result.
- In each case, we link the risk factor back to a specific per share impact – for example, if the deal doesn’t close maybe the company is worth $25.00 – $30.00, about the same as what is right now.
- We go so far as to give specific strike prices to buy protective put options at. This is probably going overboard, but you get the idea: if someone asks you, “How much of a stock price decline would you accept before selling?” you have to give an answer.
In this case, since we see only 10-15% upside in the stock there’s no point in being willing to lose more than 5%.
The worst case scenario at the end is interesting because we really are screwed if something goes horribly wrong and the stock price plummets – unless we’ve set a stop loss or have purchased those protective options.
That is par for the course with tech / biotech / pharma companies, though – unless it happens to have a huge excess cash balance or somehow has tons of tangible assets that can be sold off, your options are limited.
And that’s it for now – again, not a “perfect” example by any means, but this should give you a better idea of how to structure your own pitches assuming that you’re going in for a detailed discussion of an idea.
To Learn More…
If you want more practice with these concepts, go practice on your own.
Take this same structure and apply it to a company you’ve been following or that you’ve found interesting and might consider pitching in an interview or case study one day.
Due to time and length constraints here, we skipped over some of the numbers and analysis that would go into a full case study, but you can get the basic idea just from what was presented here.
If you want more of a guided approach to learning this, I’ll recommend three options:
- Job Search Digest Webinars – We’re actually covering this very case study and including more on the technical parts in a case study on Tuesday next week (June 25th). If you sign up for the Job Search Digest newsletter, you’ll receive an announcement about this webinar and instructions on how to join. And yes, we do promote courses on the webinars, but you still get close to 90 minutes of free instruction even if you have no interest in signing up for anything.
- Numi’s Stock Pitch Service – I linked to this at the end of the previous articles, but he’s your best source for personalized assistance with your stock pitches and hedge fund case studies and he’s worked with dozens of clients over the years and helped them land offers in equity research, hedge funds, and more. You can visit his LinkedIn page here or email him at email@example.com.
- BIWS Financial Modeling Courses – This is a relatively recent addition but we now include bonus case studies if you’ve signed up for the Fundamentals or Advanced courses (or any combination thereof). If you’re already a member, click here to access them. These case studies cover valuation, merger models, LBO models, and more and several of them also teach you how to make investment recommendations in PE and HF interviews.
(And if you’re already a member of the site, I’m sending out an announcement tomorrow detailing what’s in all the case studies – including the fully armed and operational Death Star Dell Case Study.)
So that takes us to the end (I think) of this series on hedge fund case studies.
But there’s more on the way.
Plus, another series on a completely different topic within the hedge fund industry that you may find even more interesting…
Complete Hedge Fund Case Study Series: