Equity research entails analysis, recommendations, and assessment of investment opportunities. Deep dive evaluation of a company reveals insightful details about its performance and outlook, and, therefore, its fair valuation. Investors use the information to make vital decisions regarding how to invest their money, while traders use it to take a call on entering or exiting a position.
Equity research mainly comprises:
- Company and industry analysis – This includes a detailed analysis of the company’s business model and its long-term sustainability. The analyst will evaluate the industry’s long-term outlook as well as the competitive scenarios using various methods (Porter’s 5 Forces, PEST, etc).
- Analysis of historical financials and performance – The analyst evaluates the company’s historical financial results vis-à-vis the performance of its peers as well as guidance provided by the management. This also includes an analysis of financial statements to highlight the company’s positives and the risks facing it.
- Soliciting information from management – Unlike individual investors, equity research analysts have direct access to the management. They can ask intrinsic questions regarding the company and accordingly draw veritable insights while estimating the business outlook.
- Forecasting – Based on the analysis (related to the company) and industry research, analysts estimate how the company would perform, forecasting its financial position over a projected time period.
- Valuation – Analysts arrive at the fair value of the company based on a variety of valuation methodologies. This includes valuing the company based on its own performance (DCF) as well as relative valuation compared to its peers.
- Recommendation – Based on the valuation, equity research analysts recommend investors to either BUY or HOLD or SELL the company’s stocks.
There are mainly two types of equity research: sell-side and buy-side. While in each research, the approach followed is the same as mentioned above, the main difference between the two lies in the target audience. Sell-side includes firms/entities such as investment bankers, commercial bankers, stockbrokers that “sell” their investment ideas and facilitate decision making for their customers. Buy-side includes hedge funds, asset managers and institutional investors that have a pool of funds which they are looking to invest. In other words, sell-side entities assist buy-side individuals in their investment decisions.
Equity research provides a professional and objective analysis of a company’s potential. It is conducted with the help of financial modeling, valuation, and data visualization methodologies. The insights drawn from qualitative and quantitative analysis enable investors to make informed decisions.