Various types of research reports?

Research reports vary in length and depth, generally depending on the research style of the analyst – more detailed or more high-level; more “directional” or more analytical; more anecdotal or more data-driven. However, research reports usually share some common features, and many of them contain at least some of the following components:

• Summary and Key Points: these are standard sections on the first page of most research reports. Think of these as the short version of a book’s preface, or the teaser trailer of a movie. The summary is usually no longer than a paragraph of 8 to 12 lines, and is intended to preview the report’s main takeaways. For example, the summary may state that company XYZ reported earnings on the previous day, highlight the most important developments from the conference call, and explain how the analyst’s opinion about the company, stock rating and price target have changed as a result of that specific event – whether an earnings preview, review, coverage initiation, etc. (keep reading for more information on the different types of research reports). The key points section, often times displayed in the form of 3 or 4 bullets of a few lines each, usually dives one level deeper into the arguments made in the summary paragraph.
• Thesis: is investing in the company a good or bad idea? What factors, macro or company-specific, make investing in this company appealing or unappealing? In this section, the analyst lays out, usually in a paragraph of a few sentences in length, the reasons why you should buy or sell a certain stock. Some theses, but not all of them, will include a price target for the stock and a rating (buy, hold or sell is an example of rating scale). A good thesis will generally include a catalyst of some sort, which is an event or series of events that should help to unlock the “potential” value that the analyst sees in the company – for example, the possibility of a certain sizable contract win that the market seems to be overlooking.
• Valuation: based on the research team’s analysis, what is the fair value of the company’s stock? How did the team arrive at that valuation, and how does it compare to the market value of that stock? The methods used for valuing a company will usually fall under two main categories: (a) relative valuation: for example, given that the average P/E of a group of stocks is 12x, what should the P/E of a certain company be? (b) intrinsic valuation: discounted cash flow (DCF) is the most commonly known, and it does not rely on a comparison of valuation multiples like P/E or EV/EBITDA.
• Company description: this is usually a straight-forward paragraph on what the company does, including some high-level information on the business model, geographical distribution of the company’s revenues, maybe the year in which the company was founded and the location of its headquarters.
• Industry analysis: this is the bird’s eye view of the sector in which the company operates. The industry analysis can address as broad a segment as “technology” in general, but it more often focuses on a sub-segment, such as “networking equipment”, or “semiconductors”. In this section, you will usually read about total addressable market (a.k.a. TAM) to describe the size of the market that the company is exposed to. You will deal with describing and analyzing secular trends, such as the projected growth in the adoption of vehicle telematics equipment over the course of the past 3 and the next 5 years. In many cases, the industry analysis will provide some of the fuel to support the investment thesis that the research team presented previously on the report.
• Financial analysis: this is where the research team describes the current state of the company’s financials, the recent trends and a projection of how the company may perform in the future. How healthy is the balance sheet (cash, debt, inventories)? How has it evolved over the past 3 years? What have been the trends in returns on investment (a.k.a. ROI) in the past several quarters? What do you expect average days outstanding to be through 2016? A good financials section will usually include a comparison of the company’s performance to that of other comparable companies in the sector. Doing so will usually help you tell a story about the company.
• Financial statements: this is the 3- to 4-page section where the research team publishes a snapshot of the financial model. It usually consists of an income statement, balance sheet, and cash flow statement, but sometimes also a “drivers” table (e.g. assumption for units sold, average price, etc.) and possibly a DCF schedule. It will normally capture historical data and projected results, usually 2 or 3 years out into the future.
• Risks: this is the section in which the researcher plays devil’s advocate, and anticipates some of the issues that may play out against his or her recommendation to buy or sell a stock. If the recommendation is bullish (buy the stock), a typical risk may be “scarcity of aluminum could push commodity prices higher, increasing raw material costs and pressuring the company’s margins”. If the recommendation is bearish (sell the stock), a risk might be “increased M&A activity may turn the company into an acquisition target and lift valuations from current levels”. Risks are usually a required section of a report, because it balances the view of the analyst with the flip side of the investment call, as mandated by FINRA.

Now that we have looked at the different sections of research reports, let’s look at the different types of reports. They can be (loosely) grouped within a handful of categories. You may find it helpful to learn or brush up your knowledge about the general characteristic of each one of them.

1. Initiations: this is usually one of the longest and most in-depth research reports that an analyst will ever write on a given company. It is often the very first report created, and marks the beginning of coverage on a company that he or she will follow. Initiation reports extend through as few as a half dozen pages and take a couple of weeks to research and compile. On the other end of the spectrum, some initiation notes can span over 100 pages and take a research team of multiple associates and analysts several weeks or months to complete. Initiations are so comprehensive that they may very well contain all of the components described above, from summary to risks without skipping any section. In my view, an initiation is the “purer” form of research in sell side, because it allows the reader to look at a company from a number of different angles in a more comprehensive way. It may be the only time the research team will review a 10-K and an S1 filing from beginning to end; hold several exclusive, one-on-one conference calls with the company’s management team; and lean over mounds of industry and company-specific data with a magnifying glass to come up with a sound investment thesis.
2. Earnings previews: this kind of report contains the analyst’s take on a company’s upcoming quarterly earnings release, including his or her best estimate for what the company’s financial results (for example, revenues and EPS) may be in that specific quarter. It differs from initiations in a few key ways: first, it is usually a much shorter, less comprehensive report. Even though previews will likely have a standard paragraph or two on thesis and valuation, it will rarely go into more detail on those more fundamental discussions. Second, previews are usually more time-sensitive, or “perishable”, than initiations. As a result, most of the text on a preview note focuses on how the company may have performed in the previous 3 months and, at best, what that performance will likely mean to the overall investment thesis. The time horizon of previews tends to be much shorter, and its value declines or expires as soon as the company reports earnings. Not every research team, however, will publish previews. It will depend largely on the analyst’s habits and whether the research team thinks the report might add value to their clients, strengthen the relationship, help to establish authority, or generate trade or other sources of revenues to the sell side firm.
3. Earnings reviews: these are some of the most well-known documents published by sell side researchers. These notes summarize the key facts disclosed in an earnings release. The content of reviews resembles what you may hear on CNBC during earnings season: a summary of the most important financial results and metrics, like EPS or number of subscribers, and how the results fare against what the Street expected them to be. These research notes are usually quick and to the point. They are usually factual, and are normally assembled within a few minutes or hours. They are the commodity notes: most research teams will issue them, and most of the content will be more standard than ground-breaking. In reality, few are the earnings reports that stand out amongst the crowd. I have always thought of reviews as more of a “check the box” type of report, one that will likely not give meaningful visibility to the researcher’s work, but will keep his or her work on the client’s radar screen.
4. Deep-dives: these research reports are generally produced and published between earnings season, around the end month 2 of a given quarter. Deep dive reports more closely resemble initiation reports, in which they deeper into the fundamentals of a company. They may also include more immediate, relevant short-term topics, such as the preliminary results of quarterly channel checks. Although deep dives can be time consuming, they are some of the most note-worthy research notes, and will usually generate a great deal of interest from clients.
5. Flash notes: these reports are meant to capture special events, such as breaking news that are note-worthy, but may not require model or assumption revisions. An example of such an event may be the hiring of a new COO to fill in an empty spot left by the previous officer. The analyst may want to share the news and his or her opinions about the newly-hired COO, but may not want to expand much further beyond a couple-paragraph update. Flash notes are usually the most perishable of research reports, and will tend to lose their relevance within hours or days after publishing. For this reason, flash notes are usually short, hardly ever extending beyond one page. While it is important for you to acknowledge the existence of flash notes and understand what they are, at a high level, these short reports are usually the least useful types of reports in sell side research.