Start work with a good night’s sleep.
In finance, you are the product, whether in trading, banking, sales, or research. You need to hit your performance targets by getting votes on the sell side or generating returns on the buy side. Your performance ultimately generates the sales for the business.
I realized this early on when I made the mistake of going to the office hungover.
That morning, Apollo Education, a company we covered, reported earnings. The stock was down 20% on the release before the market opened. I walked into the office, head pounding, sat at my desk, and immediately the phone rang.
I took a call with a portfolio manager, who immediately asked, “Why is Apollo’s stock down?”
I had no idea. I told him, “I think they missed some kind of expectation.”
And then he replied, “What did they miss?” I couldn’t think clearly. So I just mumbled, “I think they missed on…whatever everyone was expecting them not to miss.”
…and he hung up.
That was so embarrassing. At that moment, I realized I had to be sharp at 7 AM. No more going out for drinks on the weekdays. I needed to prioritize sleep instead.
From that point onwards, I always slept at least 8-9 hours each night so that my mind was clear and ready to go as soon as I stepped into the office.
The lesson is to get a good night’s sleep to be ready to perform.
Tell people what to do with research.
I made the mistake of thinking equity research… is about research.
The first few reports I wrote, I covered all the details: the history of the company, what it does, the different parts of the industry, and how it works—each time, my boss moved it all to the back, then told me to find forecasts and write a view on the first page.
It turns out that most of the research on Wall Street is simply ignored.
Or, as another analyst loved to say, in his thick long-island accent, “Nobody cares.”
The research is only valuable to investors when it can tell them what to do.
We put out a 200-page data report on the education sector each year. It was filled with all types of data and charts—everything from total spending demographics to types of degrees.
I don’t think anyone actually read it.
However, this data became useful when it helped investors select a stock.
For example, in 2014, Strayer University changed its strategy. They lowered tuition rates and started corporate partnerships to educate working adults. We used the data to size the growth opportunity for working adults to show the relative quality of Strayer’s education.
That helped investors understand the new opportunity for Strayer, and a few investors purchased Strayer’s stock in their funds after using our research.
Good research ultimately helps investors decide either:
- What stock to buy or sell
- What price to buy or sell
Fast-forward to 2020 in the Covid pandemic. Worker furloughs were happening across the country. And many of these workers were Strayer’s students. So in mid-2020, Strayer’s management told investors that their next quarter’s new enrollments would be down 27% y/y.
That was a surprise because growth was trending at about 15%, and many investors (who weren’t close to the story) actually bought Strayer, thinking it was a recession-proof stock.
That day, stock dropped from $180 to $100 per share. An aggressive fund manager called me after the release and asked me where the stock could go. I could do some quick calculations because I had a Strayer’s model prepared and historical data on the sector at hand.
I estimated the new earnings per share (EPS) and downside valuation and thought it could go down to $70. He shorted it immediately after the call. And rode it down to well below $70.
The lesson is that research is only useful when it can help someone make a decision.
Simplify things to 1-2 drivers.
I was completely overwhelmed in my first year in equity research. We covered 30+ stocks across several industries, and I could barely keep up with all the information.
I started simplifying the businesses into 1-2 drivers to make understanding them easier.
For example, here’s the drivers of Gartner, an IT research company we covered:
- It grows sales headcount by 8-10% each year to sell more research
- Productivity programs increase the sales per salesperson.
- Put together, earnings per share grows about 15% each year.
The funny thing is, once I started to talk with clients that way, they saw me as an expert! Our salespeople began to leave comments like, “Henry understands his stocks really well” or “Clients find him really helpful.” All because I simplified things down.
This is the core of the equity research analyst’s job:
- Understand and summarize the business
- Identify what will make the business grow or change
- Develop a view of what it will look like in the future
You can develop a view once you simplify to what’s most important.
In 2020, I helped a hedge fund analyst position an investment into Gartner going into 2021. We identified three potential drivers for the stock for the next year:
- Gartner’s turnaround was starting to work (they had acquired a sluggish business)
- IT business spending looked like it was improving
- Economic trends looked positive
Once we identified the drivers, we estimated Gartner’s earnings for 2021 could be as high as $900m in EBITDA, while Wall Street expected around $750m in EBITDA.
There was a 20% upside to the stock’s expected earnings. That was the opportunity.
We positioned an investment in Gartner around $150-160 / share ahead of this earnings recovery. Gartner reported strong earnings growth through 2021, which pushed the stock past $200 and well into the $300’s.
Simplify things to 1-2 drivers, and you can start to develop a view.
Develop a strong personality and opinion.
One thing I learned about the sell side is that it is difficult to get attention. Investors have 20-30 brokers all vying for the business. One of the problems is that analysts all start to sound the same. Most reports say the same things — because we’re getting the same information.
However, one of my colleagues (at a different bank) didn’t have this problem.
A group of analysts were out at a company conference in Florida, and a few of us got together afterward to get drinks before catching our flights.
We ordered a round of margaritas. The next thing I know, my colleague is flirting with the waitress.
He’s a South Asian guy but also has really blue eyes. She’s asking him if his eye color is real or if he’s wearing contacts. He says they are real and tells her to poke his eye to check.
“Common, poke my eye!” The rest of the evening was a blast.
Turns out he gets plenty of business! Every management team wants to travel with him, so his calendar is always filled with meetings to take companies to see investors.
(One of the main ways equity research gets paid is by setting up management meetings.)
I realized this when I made a really aggressive recommendation on a financial data company, MSCI, in 2020. ESG (environmental, social, governance) investing was generating returns, and I believed that ESG was the next big trend in asset management.
MSCI had the leading data business for ESG investing, so I saw the opportunity.
I analyzed the market size and put together the valuation numbers. I told investors they had to buy MSCI because ESG would accelerate MSCI’s growth. I put out an aggressive $500 / share target when the stock was only $400/share.
That recommendation got attention. The press picked it up (Barron’s wrote about it on its front cover), salespeople loved pitching the idea, and big-name funds were calling in, wanting to talk. The stock also popped up right after the recommendation as well.
The lesson is that you can stand out with a strong personality and opinion.
Become the axe.
The axe in finance means you are the go-to expert on a stock. If you’re in trading, it means you’re the center of all the trading volume, and in research, the center of information flow.
Becoming the axe should be the goal of any finance person.
I realized this from our giant data book on education. I spent hours preparing the report, so I went deep into the sector and all the data.
When a team at JPMorgan was looking into the education sector and an investment into DeVry Education, our team was the natural fit to help them out. Because I had a deep grasp of all the information, their analyst would ask me for suggestions every week. I sent him all kinds of data tables and charts with suggestions on how to put together an investment case.
After a few weeks, they had gone through their entire diligence process. And then I remember I got a call from the analyst one evening.
He thanked me for all the work, then asked, ‘What does your gut say about the stock?’
I was still relatively new then, and this was the first big-name investor asking for my opinion on a stock! I still remember it today.
I told him honestly I didn’t think the company was that great, the space wasn’t growing, and I didn’t think their programs were compelling either.
Ultimately, JPMorgan passed on DeVry Education.
Instead, they invested in a childcare company, Bright Horizons, which performed well over the next few years. DeVry’s stock didn’t go anywhere.
Because I had built up trust with a deep knowledge of the sector, the JPMorgan team called me every quarter to ask for my opinion. They voted for me each quarter (which gets you paid in research). I became an advisor for their investments in the space.
That is the ultimate goal for any equity research analyst, buy-side or sell-side.
The lesson is you become an advisor by becoming the axe.
