The Investment Club "Stock Pitch" Process & Template

21st Oct '20 by Edward Croft

24 comments 7861 reads

Since we've gone public with the research and results of our Staff Investment Club here at Stockopedia, we've published a number of in depth "Stock Pitches" that have been made at club meetings. While the pitches themselves are highly valuable research notes in and of themselves, many subscribers have mentioned how useful they are finding the "template" for their own research. So I thought it would be worth publishing the template as a standalone piece to inspire a bit of discussion about research processes.

We've tried to encourage staff to follow a consistent format for structuring their pitch - as it really helps in both the research phase and the delivery. This template has been evolving over time and certainly isn't complete - in fact I'm hoping that by publishing this we'll inspire a bit of dialogue from the community about how to improve it. The template is designed to be just comprehensive enough for someone to cover most of the important bases to really get to grips with the story behind a stock.

1/ Finding a Stock Idea

Some people find this intimidating. But to me it's quite simple. There are a couple of main approaches to finding a good idea:

Find ideas using Databases - use the StockRanks or a sensible Stock Screen (in the Club we are using the basic rules StockRank > 75 and MktCap > £20m) on Stockopedia.com to create a shortlist of shares to look at. Then just pick a few and get cracking looking into them. I find the StockRanks & Styles absolutely invaluable for understanding the type of share I'm dealing with and whether I want to spend time researching it. For the Investment Club we don't look at any shares with a StockRank less than 75. The stock market is a game of odds - you don't have to swing at every pitch - and historically low StockRank shares have underperformed - why bother?
Find ideas using Scuttlebutt - scuttlebutt is a great word for social gossip or rumour. There are so many great sources for finding shares that intelligent investors are investigating. Whether via the Stockopedia Community, including the wonderful Small Cap Value Report, Twitter (my top tip - be very selective in who you follow), webinars and videos from MelloEvents.com,

Unlock with Email

Unlock with Google

Already have an account?
Login here

Gromley

21st Oct '20

Lol Peter - but to be fair snuffing out, extended the life of many candles, so not all bad!

Edward Croft

@letap - that's a very kind compliment... I'm not sure my wife agrees that I'm a good communicator - it all depends on the subject!

It's worth remembering that you can seriously overcomplicate the stock market. The reality is that building a sound portfolio doesn't necessarily need that much research into individual shares.

Focusing on a few key factors in a diversified portfolio is really the most important thing - e.g. ensuring good exposures to quality, value and momentum and diversifying across groups.

There have been academic research studies that show that collecting more information does not lead to better results.

If you gather any more than 5 key pieces of information on an investment your prediction of its outcome doesn't improve, but your confidence in that prediction does enormously. This is actually a serious hazard - as it leads to overconfidence. Overconfidence makes you more attached to your holdings, more likely to overweight them, and less likely to sell when things go wrong. It's a classic private investor trap !

So - while I'm endorsing a solid research process for shares in this article - I actually think that (in a diversified portfolio) the majority of it is wasted effort ! The whole NAPS (No-Admin-Portfolio-System) series that I write on the site is I guess my way of illustrating that you don't have to overcomplicate the stock market to do ok.

Simple can work just as well as complicated.

On the other hand, if you do take the time and effort to get to know individual shares - you are much more likely to find and stick with the true stock market gems. There are always a handful of shares that end up compounding returns - growing 30%-50% annually over five or ten years. If you don't know their story inside out, you are much more likely to sell these shares and miss out on the really life changing results.

Sorry if I'm contradicting myself - but we can't understand the world without good mental models, but all models are there to be broken.

Russell Ali

What is the RNS?

RNS is the "Regulatory News Service" - it's the official newswire of the London Stock Exchange through which all listed companies have to announce any market impacting news. e.g. results, trading statements, acquistions etc etc

Kieranj077

Great write up and thanks for sharing, Ed. I've taken some of the ideas above and put them into my own research template.

It would be interesting to know what tools people are using to manage and document their research. I personally use Confluence for documentation and find it useful for keeping everything organised. It means I can create document templates and ensure everything is covered before I make a purchase. So far it's worked pretty well! I couldn't imagine going back to Word/PowerPoint/Google Docs.

Cheers

ryaninvests

22nd Oct '20

What an execellent wrtie-up Ed! Thanks very much for sharing. As a new investor, I'm learning that Research is key for investing.

Mr.Corbett

Ed, it's an excellent article, it's just what I needed and will help me enormously on my investment journey. Thank you for sharing

RMundy

Morning all, and thank you Ed for your positive words about Research Tree.

I feel I can't let you get away with being so nice without a brief comment on Stockopedia! We came on the scene around five years ago and launched Research Tree driven by the strong feeling that investors needed better access to research. In learning about the landscape I rapidly came across Stockopedia.

I've been a subscriber to Stocko on a personal basis ever since and I say (again without any agenda) that it is without doubt one of the most useful services available.

I've always had a grudging admiration for Ed's eye for the aesthetic and the way he and his team have not just packaged up the enterprise-level financial data into an easy to use interface, but also built on it with their own data and analysis, as well as providing the fantastic daily commentary from the likes of Paul Scott. It is no wonder he and the team have built such a vibrant and high quality community .

Mark Penney

Hi Ed,

Excellent summary for what to look for-I agree with all that has been said.

As a former financial advisor who met with many senior fund managers in my time, I slowly started to realise the edge they had on us(fund managers) was their ability to access some amazingly bright minds around them-yes "they pulled the trigger" and sized their investment portfolios but what you realise as you get older is that if you do your research and have conviction in your process then you don't go far wrong. The temptation is to dive in and out-and that is a recipe for disaster... What you have provided is a great template to help the masses.

I enjoy the "sounding board" of Paul's small cap updates and the interesting comments on the message boards.

I wonder how you feel about regional gatherings (the Mello online is great) but nothing quite beats the cut and thrust of folks in a room-Covid-19 not withstanding.

Best wishes,

Mark

WealthRoad

I use Excel - can plug in key quantitative and qualitative information and it pops out the buy-reject analysis for me against my criteria in green and red. A sea of red and I move on.

If a few red, I consider these 'reject' red ones carefully before I actually make a purchase. For example. P/E ratios have been high (red) for a while for companies like GAW. When I looked at other well run businesses, they almost all had high P/E ratios in the current abnormal market conditions so I put less weight on those elements that are (temporarily?) affected by the environment. This has realised significant profits, which is, of course, why we all do this.

The more I invest though in a short space of time, the less I use the spreadsheet for analysis as I can then do it in my head just scanning the info in Stockopedia. When there's a gap between purchases, it's very useful to remind myself of the system. I've even created a stock-screener in Stockopedia to automatically find me shares that could be of interest against my criteria. Powerful time-saver.

Excel's also great for tracking my holdings and overall portfolio, setting soft (viz. thinking about getting out now as it's falling) and hard stops (including easily monitoring the typical daily swings to keep stops at sensible limits); and calculating my stock and portfolio's annualised volatility. I update close prices daily and freshen my trailing stops too should a new high have happily been reached on any of my positions.

The volatility part's a recent discovery (courtesy of Anton Kreil) and helps me assess whether I'm taking too much risk when compared to my return. For example, a 15% return on a 50% annualised risk position is bad - could blow up in 6 months. But 15% return on 12% volatility means I'll be making money forever. Volatility's very easy to calculate (see Investopedia - apply two simple statistical formulae on daily % fluctuations, already builtin to Excel).

For broader information around a share I own or am watching, I don't retain my own copies but use, well, Stockopedia...! :)

I am keen to include a Technical Analysis assessment of the stock to the template. TBH I don't buy shares below their 200d MA myself - but the club dropped that rule in the March selloff madness. I like to see little overhead supply and ideally a sound breakout from a base with volume confirmation. I have been doing the same ever since I read Stan Weinstein's book 20 years ago. Classic example was Novacyt Sa (LON:NCYT) 's recent move.

That would be really useful. Totally in agreement with your thought process.

WarrantStar

Ed This is great stuff! Every investor should have both a strategy and a process. There is a great process coming through with your club. But what about the strategy that determines the process? Are all the club members supposed to have the same strategy? I think there should be a brief strategy statement for each pitch. Maybe they are all the same strategy or they are diverse strategies? To illustrate the point I provide my strategy statement "WHEN MARKET CONDITIONS ARE SUITABLE, BUY (AND / OR HOLD) UK GROWTH COMPANIES AT A REASONABLE PRICE WHEN THEY ARE SHOWING POSITIVE MOMENTUM" Sorry for all the capitals, I'm not shouting, it's just a bad habit I have of not switching between upper & lower case. The main question is " What is the strategy?"

timk

24th Oct '20

Found it very useful - my version below

1/ Finding a Stock Idea
Three critical timeframes for running winners and cutting losers Croft 2012
Short term (1w to 2m) prices tend to reverse their previous trend.
Medium term (6m to 1y) prices tend to continue their previous trend.
Long term (3y to 5y) prices tend to reverse their previous trend.
Select from top 6 month performers
after eliminating “Highly Speculative” stocks, the four negative Stock Styles, and the bottom half of Stock Ranks
Reducing to a list of 100 by a minimum 6 month price growth. Currently about 80% and set at no less than 20% regardless of number on list.
2/ Gathering Resources for Research
Stockopedia.com Allows me to filter to the criteria above.
ProTA my charting package for Trend quantification

3/ Fill out the Template
The template so far has a list of companies with
6 month growth
Profile
Single factor focus with “Junk” - Highly Speculative and negative style eliminated.
About the Stock:
What is the company's name and ticker symbol and on what exchange does it trade? ASX only for me.
What is its sector & industry group? Of no interest in a concentrated folio limited to less than five positions.
What is the share price, market cap and liquidity? Liquidity is considered by Average 3 month volume, time current close, divided by $A20,000; and an upper cutoff of say $A 1.5M (for large value folio simulation)
What are the essential metrics - StockRanks, PE, Yield? Handled by SR >= 50, and price growth rate.
About the Opportunity:
Medium term (6m to 1y) prices tend to continue their previous trend and performers on the list of candidates.
Business & Model
Not considered for Selection, may be aprt of story to explain performance after purchase.
Market & Competition
Again a post purchase performance explanation factor.
Financials & Ownership
6 month price change is one of the least manipulable pieces of information.
Recent Trading & News
Pre purchase announcement check for items that say no to entry.
Trend & Sentiment
Given the common use of 200 and 50 day times these two moving averages on a chart, shaded for “Gold” and “Dead” are the first factor
Using the 50 day time I’m comfortable with a Linear regression fir with a + and - 1 Standard Deviation Envelope; could also use a “Bollinger” or similar model.
Closes under the Lower Deviation are classed as “Out”
Closes above the Upper Deviation are classed as “Too Hot to enter”, reversion to mean.
Price return from “Hot” could lead to an Entry if followed by a “Hook up”.
“Hook” below the Regression line and above the Lower Deviation indicate an “Entry” Signal.
Close in the Envelope indicate Hold if rising or In but no Entry if falling.
4/ Summarise it
The summary is only made for an action possible Stock and consists of:-
Ticker & Name
6 m growth Rank and rate
Entry signal - under mean or return from Hot
5/ Pitch it
When the operation has investable cash the action is based on the rank order of competing pitches, till all cash is in market
The folio of between two and four positions with no cash is reviewed :-
Has any position returned 40% or more since acquisition under a year ago?
Sell worst performer and put funds into this position.
Is any held position at a lower rank than the pitch candidate?
Is the position held returning more than the pitch candidate?
If yes pass pitch, otherwise sell and fund pitch

tony axon

I really appreciate this new part to stoko,my zulu stratedgies had led me to several of the cos. you selected,and articles recently have pleased me ,took up NCYT on Jack's first writeup,and increased again after Keelan's excellent analysis. Loopup was in because of IC. S. Thompsons,comment as was VLG. So following some of the comments you make plus own zulu sieves cos..

One thing I hav'nt seen covered is when to sell ?? Do you have a plan?

For instance I heve been thinking about NCYT, have decided should?? the holdings get to 100%[overall 70%+ currently] take 25% out. Should it do another 100%??? repeat with another 25% sale. This is simply for this type of company, ie in the right place at the right time. This again comes from a stoko article with one of the big US investors[sorry name escapes me] and is my way of interpreting his selling comment. My normal way is to stay with it while the growth story is complete,and the sieve figs continue to rise.

Last year was my high point 38% gain,best I've ever done after 25 years of investing.To put this in perspective, I read what was going on with Covid, and it seemed a nasty form of flu ! how wrong could one be????? When the market was hit .lost all last years gain plus another 150K. however have completely rebuilt portfolio,and now within £80K of this years start. Portfolio now consists of profit making cos. that have a good chance of continuing business, possibly being enhanced because of Covid,and our new way of doing things. Thank you,and your staff for all sorts of insights which add to ones own investing stratedgy Cheers stay safe Tony

pka

Hi timk,

Your process seems to be thorough and well thought out, and is no doubt very profitable. For me, following it would have the disadvantage of requiring much more time and effort than I would be willing to spend, as I like to keep things simple.

Thanks. Agree it does take time. tiim

Howard Adams

25th Oct '20

Hi Ed

Excellent posting, thank you.

Would it be possible to offer the writeup in a PDF form at all?

No worries if you cannot do this though.

Regards

Howard

Rusty2

27th Oct '20

Hi Ed, yes interesting article but I was wondering about holding period and selling, I could not see any mention about them. Are these reviewed on a monthly basis or do you intend to hold for a certain period such as 6 months or a year?

29th Oct '20

Yes Herbie,

I agree. I think it best for all traders & all investors to have in mind a planned holding period before they buy anything. After all, there is a tremendous difference between 5 minutes and 5 years! And the planned holding period should be a good match to the characteristics that one would be looking for, or trying to avoid. I'm sure many of us have heard the joke "What is the definition of a long term investment? The definition of a long term investment is one that was originally bought as a short term investment. But it didn't work out and has now become a long term investment!"

The Investment Club "Stock Pitch" Process & Template

1/ Finding a Stock Idea

Unlock the rest of this article with a 14 day trial

About the Author

Edward Croft

24 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...