EQUITY RESEARCH REPORT ESSENTIALS, Assignments of Business Accounting

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EQUITY RESEARCH

REPORT ESSENTIALS

An equity research report can include varying levels of detail, and although there is no industry standard when it comes to format, there are common elements to all thorough and effective equity research reports. This guide includes some fundamental features and information that should be considered essential to every research report, as well as some tips for making your analysis and report as effective as possible.

BASIC INFORMATION

The research report should begin with some basic information about the firm, including the company’s ticker symbol, the primary exchange where its shares are traded, the primary sector and industry where it operates, the investment recommendation, the current stock price and market capitalization, and the target stock price.

In addition, the liquidity and float of a security are important considerations for the equity analyst. The liquidity of a stock refers to the degree to which it can be purchased and sold without affecting the price. The analyst should understand that periods of financial stress can affect the liquidity of a security. A stock’s float refers to the number of shares that are publicly owned and available for trading and generally excludes restricted shares and the holdings of insiders. The float of a stock can be significantly smaller than its market capitalization and thus is an important consideration for large institutional investors, especially when it comes to investing in companies with smaller market capitalizations. Consequently, a relatively small float deserves mention. Finally, it is good practice to identify the major shareholders of a firm.

BUSINESS DESCRIPTION This section should include a detailed description of the company and its products and services. It should convey a clear understanding of the company’s economics, including a discussion of the key drivers of revenues and expenses. Much of this information can be sourced from the company itself and via its regulatory filings as well as industry publications.

INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING This section should include an overview of the industry dynamics, including a competitive analysis of the industry. Most firms’ annual reports include some discussion of the competitive environment. A group of peer companies should be developed for a competitive analysis. The “Porter’s Five Forces” framework for industry analysis is an effective tool for examining the health and competitive intensity of an industry. Production capacity levels, pricing, distribution, and stability of market share are also important considerations.

It is important to note that there are different paths to success. Strength of brand, cost leadership, and access to protected technology or resources are just some of the ways in which companies set themselves apart from the competition. Famed investor Warren Buffett describes a firm’s competitive advantage as an economic “moat.” He says, “In business, I look for economic castles protected by unbreachable moats.”

INVESTMENT SUMMARY This section should include a brief description of the company, significant recent developments, an earnings forecast, a valuation summary, and the recommended investment action. If the purchase or sale of a security is being advised, there should be a clear and concise explanation as to why the security is deemed to be mispriced. That is, what is the market currently not properly discounting in the stock’s price, and what will prompt the market to re-price the security?

VALUATION This section should include a thorough valuation analysis of the company using conventional valuation metrics and formulas. Equity valuation models can derive either absolute or relative values. Absolute valuation models derive an asset’s intrinsic value and generally take the form of discounted cash flow models. Relative equity valuation models estimate a stock’s value relative to another stock

CFA Institute EQUITY RESEARCH REPORT ESSENTIALS SEPTEMBER 2020

CFA Institute Code of Ethics and Standards of Professional Conduct

Best Practice Guidelines Governing Analyst/Corporate Issuer Relations