What is Equity Research?

Will B

Equity research is the backdrop of any investment activity. If an investment is a theatrical performance, equity research would be what goes on backstage.

It is usually conducted by a team of associates (junior researchers), headed by an analyst (senior researcher), the aim of this type of research is to advice on buying, selling and/or retention of investments. There are equity research divisions in conventional investment banks as well as pure equity research firms.

A team usually covers between 5 and 15 companies of the same industry, enabling them to focus on the similarities between how these companies operate financially and what makes them potentially rewarding investment prospects.
The results of any research are shared through a report. These reports are frequent depending on the volatility of the industry covered by the team; however, they usually coincide with press releases, important announcements and quarterly publishing of financial results by the
companies in question.

What is an Equity Research Report?

An equity research report aims to evaluate current and predict future performance of a company for its current and potential investors. This is usually reactive to recent developments in the market. This includes competition from a new competitor, or developments in the company, like launch of a new product, change in management personal, recently published financial information, etc.

The contents of a typical equity research report include
the following:

 Industry Background:

This section defines the industry, it’s participants(companies), it’s level of competition, along with external political and social influences positively or negatively affecting the profitability and attractiveness of the industry. These are the playing conditions for the company under analysis. Presentation of a bigger picture before introducing the bigger players.

 Management commentary:

When investing in a company, providing due consideration to the views of the people running the company is crucial. These are decision makers in control of the performance. This section goes beyond public knowledge and a good report would include exclusive first- hand information acquired directly from key management personnel.

 Historical financial performance:

This section analyses company’s past performance. The extent of history covered may vary between reports but up to 5 years is enough to provide an indication of the company’s most recent financial health statistics, and whether it’s performance has been on par with expectations and predictions, in the past. A predictable company is a safe bet; this section aims to define the predictability of the company in recent times, perhaps making it more attractive to the conservative investors looking to hedge their risks.

 Forecasts:

This section provides predictions of the company’s future performance, quarterly or semi-annual. These predictions are based on past trends, estimates and forecasts as drawn by the associates and analysts who understand the industry and company to an expert level. What makes these predictions reliable is the collective experience of the research team, their knowledge of the company and the industry, and other expertise they may have developed in course of their schooling or career.

 Valuation:

So, what exactly do you mean? Some investors with all the funds but perhaps a lack of foresight might be asking this question even after the “Forecasts” section. “Bottomline” is what they want and that is what they get with they will get here. This section provides a definitive estimation of the value of investment at a future date in light of all the aforementioned facts and figures, predicted using financial models deemed appropriate by the research team. These models, known as “Financial Models”, are an assortment methods which derive the future values of investments using past, present and future information.

 Recommendations:

Buy or not buy? Sell or not to sell? Keep or not to keep? This section lets the investor know what the research team thinks they should do with the investment. This recommendation is the final verdict. Most investors will get their course of action from the content of this particular section. A rating would usually be given to the investment in question to indicate the suggested course of action. Common terminology used for these ratings include:

  1. Buy, Outperform, Overweight
  2. Hold, Neutral, Marketweight
  3. Sell, Underperform, Underweight

 Risk & Disclaimers:

This section acts as a legal disclaimer for any investments made subsequently and/or on the basis of the analysis included in and recommendations made by the research report. Assuming the team is reliable, the data included in the report is credible. The analysis is the work of experts, hence it is as good as word as one may find on the future trajectory of an investment. However, it is still based partially on assumptions, estimates and forecasts which are subjective in nature. These reports are reliable as a lot of work and effort goes into their creation but, with caution.

Equity research, in simple terms, is an attempt at making investments predictable and consequently low risk. It aims to facilitate the investment game, be it an independent or an institutional act, intelligent placement of surplus funds or an active attempt at capitalization. Either way, this wing of the world of investment acts as
the silent dictator, making the act of investment more than a game of a chance.

This article was written by Muhammad, an aspiring financial services professional.

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