Sausage rolls and the equity research process

Sausage rolls and the equity research process

For my son’s school course work, he had to design and perform a series of experiments to identify the differences that gluten content in flour can have on a food. As a fan of sausage rolls, he proceeded to make three separate batches in parallel, using plain, bread and pasta flour. The production is straightforward but can be much more time consuming than expected. He aimed for dinner at 8:15pm, but in the end we ate after 10pm. It turns out that parts of the process, in this case the freezing and grating of butter, takes quite a while. 

Producing quality equity research similarly can be much more time consuming than expected.
Our equity team generates ideas for further analysis from a wide variety of different sources. They may come from our systematic screening using several proprietary metrics, or from meeting company management teams, conferences and reading. We encourage analysts to spend as much time as is necessary to look at a company, to decide if a full research piece is warranted. Ideas that might be dismissed rapidly might include companies who have seen a stock split, which has not yet been factored into our data provider’s database.

Once a full piece of research is justified, we require analysts to conduct more detailed studies, including production of a valuation model and completion of a research template. Use of such a framework, and a written culture, helps ensure that analysts consider all relevant aspects of the company in evaluating their investment case. Usually in examination of historic report and accounts, quarterly filings and investor relations documents/events, analysts will have questions for the company which may be answered by investor relations, or in discussions with company management teams. This process can be somewhat protracted given the availability of people for discussions and quiet periods. Other third-party sources of data are frequently required to help establish the drivers and most likely path of the company’s future. Differences in views with consensus estimates are examined and an attempt to spell out catalysts for superior total shareholder return is made.

Once rigorous analysis is complete, research is presented at our global equity research meeting. Analysts spell out their investment thesis on the company which is tested by the team along with relevant risks to be considered. This may give rise to further questions, requiring additional research, discussions with management or third-party industry or economic data

There is ultimately a balance between timeliness of initial research ideas and full completion of a research piece, this is something that equity investors must embrace. Working on several companies concurrently is something that the team need to do, to avoid lengthy delays in research production and to best use their time. The research sausage machine is a much lengthier process than some envisage. Looking at several similar companies concurrently tends to be a good idea and allows for better comparisons of their relative merits. 

If my son had made each batch of his sausage rolls one after the other, we would not have eaten until 4am.

Somewhat surprisingly it turns out that sausage rolls made with pasta flour were the highest quality.


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