Case Study – Stock Pitch Prep

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Hedge Funds Case Study Prep

Unlike large banks that run very standardized recruiting processes and look for very standard
types of candidates, many hedge funds are more open about who they’ll speak to… IF you can
prove that you have solid investment ideas and that you’re passionate about investing. The
industry has gotten super-competitive over the past 10-15 years, and it is generally getting
smaller – but if you can make a lot of money for a potential employer, there will always be
room for you.

In practice, of course, most people at hedge funds still come from investment banking, equity
research, or trading backgrounds – but especially at smaller funds, they care more about your
P&L than your pedigree.

Why do they ask about case studies

1. Case studies are what you really do on the job – you generate investment ideas, present
them to the PM, and aim to profit from your ideas while mitigating risk. Often, you’re
tasked with analyzing an investment opportunity with minimal guidance and hand-
holding; therefore, it’s up to you to use your intellectual horsepower and investment
acumen to figure out whether a particular asset is a good investment.

2. They’re a way to level the playing field and stand out against everyone else with high
grades from Harvard/Wharton/Stanford. Lots of people have great pedigrees, but few
can invest successfully.

3. You will get them as part of the recruiting process at every single hedge fund,
guaranteed.You would encounter different types of case studies at different hedge
funds, such as global macro, credit, merger arbitrage, or distressed fund. You’ll analyze
different assets: currencies, debt, or distressed companies rather than healthy ones.

In hedge fund interviews, “case studies” are very informal. 90% of the time they will tell you:
Come up with an investment idea you think is interesting, present it to us, and back it up with
quantitative and qualitative support. And… that’s it. It’s up to you to come up with the
structure, pick the industry and find the company, and anticipate their key questions in
advance.

Here is a basic structure of a Hedge Fund Stock Pitch:

1) Recommendation: “Neutral” recommendations are not ideal, so are you long or short
this stock? What do you think it’s worth and how much would you pay for it?

2) Company Background: Introduce what the company does and state what its current
market cap and valuation multiples are.

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3) Your Investment Thesis: Give 2-3 points about why you think the stock is price
imperfectly – these can be both quantitative and qualitative factors, but they must be
specific to the company (i.e. don’t say, “Well, the economy could crash…”). This will be
the bulk of your presentation or write-up.

4) Catalysts: So you think the stock is priced imperfectly and is worth $X when its current
share price is $Y… but what will push it to $X? Many people miss this part completely,
which can sink your chances.

5) Valuation: Support your view of what the company is worth by using the standard
methodologies: comparable company analysis, precedent transactions, DCF or other
intrinsic value analyses, and so on.
More important, though, is how you use the valuation to justify your investment
recommendation:
If you’re making a long recommendation, you have to argue that the stock is undervalued,
and ideally that a) Even in the worst case scenario, you stand to at least maintain principal
or not lose money; or b) That while you could lose money in the worst case scenario, it’s an
asymmetric risk profile because there’s (for example) a 50% chance of losing 10% and a 50%
chance of gaining 40%.
If you’re making a short recommendation, you argue that the stock is overvalued, and
ideally that a) Even in the best case scenario, you won’t lose (much) money; or b) That while
you could lose some money in this best case scenario, it’s also an asymmetric risk profile
because there’s a 50% chance of the stock declining by 40% and a 50% chance of it
increasing by 10%.

Here’s the recommended process if you don’t have a structured one:

1) identify the 2-3 key drivers for the company in question. For many companies,
these will be variants of “units sold” and “average price per unit,” and your job is
to figure out what’s driving those.
2) gather historical data on the company – not just their financial statements, but
also how these metrics have trended over the past 5-10 years. If it’s a retailer, for
example, you’d look at trends in # of Stores, Sales per Square Foot, and Square
Feet per Store over that time period.
3) Build a 3-statement projection model for the company over a 3-5 year period, with
these key drivers as your inputs to the model. Do not obsess over small items on
the statements or items that do not change (if it doesn’t balance, simplify and
tweak). Focus on the main value drivers: revenue growth, EBIT/EBITDA margins,
and CapEx and (maybe) Working Capital requirements. Make sure you can make
simple adjustments to these variables in your model.
4) Select public comps and precedent transactions for the company – use the
“Related Companies” feature in Google Finance to find and screen comps.
Precedent Transactions can be more time-consuming to find and are generally less

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important than public comps anyway, so you can even leave those out if it’s taking
hours and hours and you’re not getting anywhere.
5) Build a DCF analysis for the company where you can vary the discount rate, the
Terminal Value, and the 2-3 key drivers you identified in step #1. This analysis
should be linked to your 3-statement model.
6) Summarize your findings at the end and come up with a valuation range for the
company. Again, you need to be able to say something like: “In the worst case
scenario, we expect a value of $XX per share, and in the best case scenario, we
expect a value of $YY per share.”

6) Risk Factors and How to Mitigate Them: Remember that hedge funds are always looking
for investments with asymmetric risk profiles. All investments have potential downsides as
well, and in this section you discuss those and explain that, while they exist, there’s still a
greater chance of your own thesis being true.
In that last part on Risk Factors, you also explain how to hedge against the possibility that
you’re wrong. Much of the Q&A that takes place after you make your pitch will revolve
around understanding potential sources of downside.
What are the main risk factors?
Those could be almost anything because they depend on the company and its key drivers. A
few ideas:
• Market Size – Is the total addressable market bigger / smaller than expected?
• Pricing – Is the company under pricing pressure? Or can it raise prices regardless
of competitors or industry trends?
• Key Drivers – What do the company’s key operating metrics look like? Have they
been trending up, down, or not changing?
• Acquisitions – How have they performed? What will the company do in the
future?
• Partnerships – Are any suppliers, customers, or partners on shaky grounds with
the company?
• Financials – Are the company’s key ratios changing as you’d expect? For example,
CapEx growth or expense growth that’s out-of-line with revenue growth is usually
a red flag.
• Legal / IP Issues – Are there ongoing lawsuits? Patent problems? Disputes?
• Your job is to pick the most important risk factors and explain why, although they
could result in your prediction being wrong, you don’t think that will happen – or,
how you could hedge yourself via protective options or investments elsewhere.
Keep in mind that the risk factors also depend on your investment
recommendation – positive factors would be a risk for a “short” view, while
negative factors would be a risk for a “long” position.

Weetok Tips:

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Always show up prepared to speak about at least 2 stocks – when I was recruiting, I always had
at least 3 ideas that I could speak about credibly… and ideas where I felt like I would know more
about them than the interviewers.
And, of course, if you’re interviewing at a fund that uses a strategy other than L/S equity, you
still need at least 2-3 investment ideas that you can speak to.

How to pick the stock?

First off, you may want to reevaluate your career if you want to move to the buy-side but you
don’t already have stocks or companies you follow or want to invest in.

If you really don’t have anything, start by picking an industry that you know something about
and reading research and commentary on it, and look for companies that might be worth
analyzing further… or you could start with a “big trend” in a certain industry and find companies
that are well-positioned to take advantage of it. With the right argument and support, you
could make almost anything into a stock pitch for use in your case study – but if you don’t
already have something, you need to start by spending at least a few hours reading up on the
industry and looking at similar companies.

You can go through these steps to analyze an unfamiliar company:

1) Review the SEC filings (or just the corporate filings if you’re pitching a company outside
the US) and the company’s most recent investor presentation.
2) Then, identify the 2-3 key drivers of the stock. In some sectors, this is easy: many retail
companies, for example, will be driven by factors like total square feet, sales per square
foot, and same-store sales growth. These can be more difficult to determine in
unfamiliar industries.
3) Then, read several equity research reports to figure out the “consensus thinking” (no, do
not rely on these for your own thesis – these are strictly for background reading /
information).
4) Once you’ve done all this, start your field work – hedge funds value primary research a
lot, and you can learn far more by speaking with credible industry sources than you ever
could by reading analyst reports.

Mistakes to Avoid:
• Weak Risk Factors and Mitigants: This is very common if you’re moving in from banking
or sell-side research, because you rarely think about these factors there.

• Being Unable to Explain Part of Your Model: They could point to any number included
anywhere in your presentation or model and ask you to explain it. If you don’t have a
set of notes in front of you that explains where the key numbers came from, you’re
shooting yourself in the foot. And yes, bring these notes to the interview.

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• Lack of Energy / Conviction: If you had $10 million and were not 100% ready to put your
own money behind this idea, you’re doing something wrong. Much of the job is selling
the PM on your ideas, so you need to express this enthusiasm from the start.

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