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Writing a Credible Investment Thesis

Only a third of acquiring executives actually write down the reasons for doing a deal.

By David Harding and Sam Rovit

• November 15, 2004

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis. The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business."

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29% of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40% had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83% of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value. This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much."

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal. Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage—can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.-based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3% of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.
• The dilution/accretion debate. One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate. We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20% return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15% a year.

Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level.

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

As a rule, investors like to see their companies investing in growth. We believe that investors in the stock market do, in fact, look past reported EPS numbers in an effort to understand how the investment thesis will improve the business they already own. If the investment thesis holds up to this kind of scrutiny, then some short-term dilution is probably acceptable.

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.                                              

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

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What Is an Investment Thesis?

• Understanding the Thesis

Special Considerations

• What's Included?

The Bottom Line

• Portfolio Management

Investment Thesis: An Argument in Support of Investing Decisions

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

The term investment thesis refers to a reasoned argument for a particular investment strategy, backed up by research and analysis. Investment theses are commonly prepared by (and for) individual investors and businesses. These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients.

Key Takeaways

• An investment thesis is a written document that recommends a new investment, based on research and analysis of its potential for profit.
• Individual investors can use this technique to investigate and select investments that meet their goals.
• Financial professionals use the investment thesis to pitch their ideas.

Understanding the Investment Thesis

As noted above, an investment thesis is a written document that provides information about a potential investment. It is a research- and analysis-based proposal that is usually drafted by an investment or financial professional to provide insight into investments and to pitch investment ideas. In some cases, the investor will draft their own investment thesis, as is the case with venture capitalists and private equity firms.

This thesis can be used as a strategic decision-making tool. Investors and companies can use a thesis to decide whether or not to pursue a particular investment, such as a stock or acquiring another company. Or it can be used as a way to look back and analyze why a particular decision was made in the first place—and whether it was the right one. Putting things in writing can have a huge impact on the direction of a potential investment.

Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued . The thesis states that the investor plans to hold the stock for three years, during which its price will rise to reflect its true worth. At that point, the stock will be sold at a profit. A year later, the stock market crashes, and the investor's pick crashes with it. The investor recalls the investment thesis, relies on the integrity of its conclusions, and continues to hold the stock.

That is a sound strategy unless some event that is totally unexpected and entirely absent from the investment thesis occurs. Examples of these might include the 2007-2008 financial crisis or the Brexit vote that forced the United Kingdom out of the European Union (EU) in 2016. These were highly unexpected events, and they might affect someone's investment thesis.

If you think your investment thesis holds up, stick with it through thick and thin.

An investment thesis is generally formally documented, but there are no universal standards for the contents. Some require fast action and are not elaborate compositions. When a thesis concerns a big trend, such as a global macro perspective, the investment thesis may be well documented and might even include a fair amount of promotional materials for presentation to potential investing partners.

Portfolio management is now a science-based discipline, not unlike engineering or medicine. As in those fields, breakthroughs in basic theory, technology, and market structures continuously translate into improvements in products and in professional practices. The investment thesis has been strengthened with qualitative and quantitative methods that are now widely accepted.

As with any thesis, an idea may surface but it is methodical research that takes it from an abstract concept to a recommendation for action. In the world of investments, the thesis serves as a game plan.

What's Included in an Investment Thesis?

Although there's no industry standard, there are usually some common components to this document. Remember, an investment thesis is generally a proposal that is based on research and analysis. As such, it is meant to be a guide about the viability of a particular investment.

Most investment theses include (but aren't limited to) the following information:

• The investment in question
• The investment goal(s)
• Viability of the investment, including any trends that support the investment
• Potential downsides and risks that may be associated with the investment
• Costs and potential returns as well as any losses that may result

Some theses also try to answer some key questions, including:

• Does the investment align with the intended goal(s)?
• What could go wrong?
• What do the financial statements say?
• What is the growth potential of this investment?

Putting everything in writing can help investors make more informed decisions. For instance, a company's management team can use a thesis to decide whether or not to pursue the acquisition of a rival. The thesis may highlight whether the target's vision aligns with the acquirer or it may identify opportunities for growth in the market.

Keep in mind that the complexity of an investment thesis depends on the type of investor involved and the nature of the investment. So the investment thesis for a corporation looking to acquire a rival may be more in-depth and complicated compared to that of an individual investor who wants to develop an investment portfolio.

Examples of an Investment Thesis

Portfolio managers and investment companies often post information about their investment theses on their websites. The following are just two examples.

Morgan Stanley

Morgan Stanley ( MS ) is one of the world's leading financial services firms. It offers investment management services, investment banking, securities, and wealth management services. According to the company, it has five steps that make up its investment process, including idea generation, quality assessment, valuation, risk management , and portfolio construction.

When it comes to developing its investment thesis, the company tries to answer three questions as part of its quality assessment step:

• "Is the company a disruptor or is it insulated from disruptive change? 
• Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage? 
• Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?"

Connetic Ventures

Connetic Adventures is a venture capital firm that invests in early-stage companies. The company uses data to develop its investment thesis, which is made up of three pillars. According to its blog, there were three pillars or principles that contributed to Connetic's venture capital investment strategy. These included diversification, value, and follow-on—each of which comes with a pro and con.

Why Is an Investment Thesis Important?

An investment thesis is a written proposal or research-based analysis of why investors or companies should pursue an investment. In some cases, it may also serve as a historical guide as to whether the investment was a good move or not. Whatever the reason, an investment thesis allows investors to make better, more informed decisions about whether to put their money into a specific investment. This written document provides insight into what the investment is, the goals of the investment, any associated costs, the potential for returns, as well as any possible risks and losses that may result.

Who Should Have an Investment Thesis?

An investment thesis is important for anyone who wants to invest their money. Individual investors can use a thesis to decide whether to purchase stock in a particular company and what strategy they should use, whether it's a buy-and-hold strategy or one where they only have the stock for a short period of time. A company can craft its own investment thesis to help weigh out whether an acquisition or growth strategy is worthwhile.

How Do You Create an Investment Thesis?

It's important to put your investment thesis in writing. Seeing your proposal in print can help you make a better decision. When you're writing your investment thesis, be sure to be clear and concise. Make sure you do your research and include any facts and figures that can help you make your decision. Be sure to include your goals, the potential for upside, and any risks that you may come across. Try to ask and answer some key questions, including whether the investment meets your investment goals and what could go wrong if you go ahead with the deal.

It's always important to have a plan, especially when it comes to investing. After all, you are putting your money at risk. Having an investment thesis can help you make more informed decisions about whether a potential investment is worth your while. Make sure you put your thesis in writing and answer some key questions about your goals, costs, and potential outcomes. Having a concrete proposal in place can spell the difference between earning returns and losing all your money. And that's if your thesis supports the investment in the first place.

Harvard Business School. " Writing a Credible Investment Thesis ."

Lanturn. " What is an Investment Thesis and 3 Tips to Make One ."

Morgan Stanley. " Global Opportunity ."

Medium. " The Data That Built Our Fund's Investment Thesis ."

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How To Make An Investment Thesis: Ultimate Guide To Best Investment Decision

An Introduction to Investment Thesis

An investment thesis forms the basis of an investor's strategy and serves as a framework to direct investment choices as well as articulate the reasoning behind targeting assets or markets. A robust investment thesis clearly outlines the factors that will drive returns while minimizing risks. Developing a thought-out investment thesis is crucial for achieving success in investments.

This guide will take you through the components of creating a compelling investment thesis from beginning to end. We will discuss how to identify promising investment opportunities, analyze target companies, perform valuation modeling, build a portfolio, present the fund's thesis to potential investors, implement the thesis in investment activities, and adapt it as market conditions evolve. By adhering to a disciplined investment thesis, investors can consistently make informed decisions and make choices to outperform the market.

Identifying Investment Opportunities

The initial step in developing an investment thesis involves pinpointing areas of focus that will shape your investment decisions. This entails determining sectors, asset classes, geographical regions, or other frameworks on which you wish to concentrate your research and analysis.

When determining the area you want to focus on, there are four key questions and factors to consider;

• Your expertise and knowledge - It is best to concentrate on areas where you have experience or can gain expertise without stretching yourself
• Macroeconomic trends - Look out for trends that can have an impact. These trends could include shifts, advancements, policy changes, and more. Identify sectors, regions, or asset classes that are likely to benefit from these long-term shifts
• Market inefficiencies - Keep an eye out for market inefficiencies. Opportunities often arise in markets that are fragmented, complex, or experiencing changes
• Investment horizons - Consider the investment horizon required for investment theses. Some ideas may require a time frame to materialize their potential returns while others may offer shorter-term gains

Once you have determined your area of focus, it is crucial to conduct in-depth research on the macro trends shaping that market. Look for trends that will drive growth over the years rather than focusing solely on quarterly fluctuations mentioned in market reports. The objective is to identify factors that can positively impact revenues, margins, and valuations of well-positioned companies.

With an understanding of the landscape established through research, you can then search for companies positioned to take advantage of the identified trends. Look for firms, with products/services/customers/geographical reach or innovative strategies that give them an edge when it comes to capitalizing on these opportunities.

Analyzing the Company

For an investment thesis, it is crucial to assess the company you are considering for investment. This assessment should include an evaluation of the company's drivers of growth, its management team and strategy as well as potential risks and challenges.

Growth Drivers

When analyzing the market value of a company, you'll want to closely examine the products, customers, and competitive positioning that are fueling its growth.

• Products: Look at the company's current product portfolio and pipeline. Do they have innovative products that are gaining market share? How large is their total addressable market and how much of it have they penetrated so far?
• Customers: Evaluate who their key customers are and how loyal they are. Look at metrics like net dollar retention rate to understand how loyal their customers are
• Competition: Analyze the competitive landscape and the company's positioning. Do they have a durable competitive advantage? How do they compare to rivals on factors like pricing, product features, and customer experience?
• Scalability: Do margins get larger or smaller as a customer increases its size? In some cases, unprofitable companies become highly profitable with growth - in other cases, costs increase in line with revenues. 

Management and Strategy

The strategy and execution capabilities of management are critical to a company's success.

• Management Team: Research the background and track record of key executives. Do they have relevant industry experience and a history of generating returns?
• Strategy: Assess management's strategic priorities and plans to drive growth. Do they have a coherent plan to expand their market opportunity?
• Culture & Incentives: Assess how they attract and retain talent. Are employees actively involved and motivated to excel?

Assessing the management will help ascertain whether the company has the leadership to seize the upcoming opportunity.

Risks and Challenges

When conducting an analysis it's important to consider factors;

• Technology Shifts: Take into account innovations that could affect the company's market.
• Regulation: Consider possible changes in regulations that may impact the business model and financial aspects.
• Macro Trends: Look at shifts in the wider economic environment that could influence customer demand.

Thoroughly examining the company across these dimensions provides the information and perspective to build confidence in your investment thesis. It helps you understand the business model, growth trajectory, management capabilities, risks involved, and valuation potential.

Conducting Valuation

Whilst a company's valuation is largely based purely on how much an investor or acquirer is willing to pay, there are a number of methodologies that help to guide valuations:

Choosing the Appropriate Valuation Method

DCF valuation is typically preferred when assessing situations where reliable projections can be made. However, for early-stage or volatile companies, it may be more appropriate to consider comparable multiples based on similar industry peers.

Making Projections and Assumptions

When making projections and assumptions it is essential to conduct research to establish credible forecasts.

Projections should encompass metrics such as revenue growth, margins, capital expenditure requirements, and working capital needs. Additionally, explicit assumptions should be made regarding elements like market size, market share, pricing strategies, and costs among others. Conducting sensitivity analysis can help stress test these assumptions.

Ensuring Upside to Current Valuation

Once you have determined the value of a company you can compare this value against its market capitalization. Look for the ultimate goal of valuation is to support your thesis that the company is undervalued. If the current market price exceeds your estimate of value it may be prudent to reassess your assumptions and analysis. The greater the upside potential identified within your analysis the stronger your conviction becomes in considering an investment opportunity.

Constructing Your Portfolio

When constructing your portfolio based on your investment thesis, you should diversify your holdings and size your positions appropriately based on conviction and risk tolerance.

Diversification

Your investment thesis should guide how you diversify your portfolio. For example, if your thesis focuses on emerging market consumer stocks, you would want exposure across multiple countries and consumer product categories. Diversifying appropriately helps manage overall portfolio risk. You want to avoid overexposure to any single company, sector, or country.

Position Sizing

When determining position sizes within your portfolio, larger positions should be allocated to your highest conviction ideas based on your investment thesis. However, position size should also be constrained based on your risk tolerance. Larger positions will drive portfolio performance but also increase volatility. 

Rebalancing

As market conditions change, rebalancing your portfolio involves  realigning holdings in line with your investment thesis. If certain positions have increased significantly in size, trimming them down and reallocating to underweight areas can improve diversification and risk-adjusted returns. Revisiting your thesis and rebalancing at regular intervals instills discipline in sticking to your core investment tenets.

Presenting to Investors

When presenting your investment thesis to investors it's crucial to communicate and address important information right from the start. Your objective is to explain your insights and build confidence in your ability to generate returns.

To begin - guide investors through your thesis, research process, and valuation methodology. Elaborate on the trends you've identified and analyze the company's growth drivers and competitive position. Share how you arrived at your valuation.

Next, emphasize your "edge”. The expertise, relationships, or analytical skills that give you an advantage in assessing this opportunity. Provide examples of investments you've made in the past by leveraging an edge to establish credibility

Lastly, demonstrate your risk management abilities by addressing challenges and risks. Outline the assumptions underlying your thesis and discuss scenarios where they may not hold true. Describe how you plan to monitor and mitigate risks related to regulations, supply chains, customer demand, or management execution. 

Implementing the Thesis

Once you have developed an investment thesis the next step is executing trades to construct a portfolio that aligns with your thesis. It is crucial to approach this process with strategic planning in order to achieve results.

When making investments it is important to allocate positions based on your level of confidence in each holding while also ensuring diversification. Generally speculative or higher risk assets should be given allocations that don’t jeopardize the portfolio as a whole.

Ongoing portfolio management necessitates actively monitoring performance against the expectations outlined in your investment thesis. By keeping track of metrics, business drivers, and macroeconomic factors you can gauge whether your thesis remains valid.

As new data emerges over time adjustments and rebalancing of your portfolio will likely be required. This involves reducing exposure to holdings where the original thesis has weakened or deteriorated while increasing exposure to emerging opportunities. 

Continuously refining your portfolio ensures that it remains closely aligned with your investment thesis as market conditions evolve. Successful investors remain adaptable. Adjust their allocations while keeping their long-term perspectives intact.

Updating the Investment Thesis

As time progresses it is crucial to revisit and update your investment thesis accordingly.

Markets are constantly changing and it is crucial to stay updated with information that emerges. Your initial assumptions may not always hold true which can lead to poor investment decisions if you stick to an investment thesis.

To ensure the relevance of your investment thesis periodically reassess all your assumptions and projections. Take a look at your growth estimates, address any emerging threats, and analyze how market sentiment has shifted. If there have been changes in the investment narrative it's essential to update your thesis

Incorporate insights from sources such as earnings reports, industry conferences, macroeconomic data, and more. I. Objectively evaluate if adjustments need to be made based on the information at hand.

The key here is flexibility; being able to adapt to information sets good investors apart from the average ones. 

Common Mistakes to Avoid When Developing an Investment Thesis

To ensure the success of your investment thesis it's important to steer clear of pitfalls. Here are a few common ones;

Lack of Diversification

Having an overconcentration in a sector, geography, or asset type can leave a portfolio vulnerable. For example, an investment thesis focused solely on fast-growing US tech companies could miss opportunities in emerging markets. 

Biased Assumptions

It's easy to fall into the trap of making projections that confirm your existing bias about a company's growth potential. Avoid exaggerated assumptions that are not grounded in facts, and remember that “hope” has historically been a bad investment strategy 

Ignoring New Information

Markets and companies are dynamic, so no investment thesis holds true forever. Do not blindly stick to your original assumptions if new data suggests your thesis is no longer valid. Be ready to change course if your investment case deteriorates. Failing to adapt can turn gains into losses.

To summarize this guide - here are the most important factors in an investment thesis ;

• Identifying economic trends and sector-specific opportunities to focus on when making investments.
• Conducting a thorough analysis of potential companies, for your portfolio including their products, customers, competitors, and management.
• Using valuation models such as discounted cash flow (DCF) analysis to determine a target value based on your projections.
• Creating a diverse portfolio by considering your confidence level and risk tolerance for each position.
• Clearly presenting your investment strategy and unique advantage to inspire confidence in investors.
• Consistently implementing your investment strategy when making buy or sell decisions.
• Monitoring your portfolio and assumptions, updating the thesis as needed based on new data.

Creating a thoughtful investment thesis takes rigorous research and ongoing discipline. However, it also establishes a framework to capitalize on the upside potential of emerging trends. Investors who take the time to develop a compelling thesis are more apt to outperform the market. With the right blend of macro perspective and individual security analysis, your investment thesis can unlock substantial value creation.

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Investment Thesis: What It Is, How To Write One & Examples

An investment thesis formulates the characteristics and criteria that define a potentially profitable investment. It outlines the reasons behind the investment decision, including various criteria, financial outcomes, and strategies to manage risks. Essentially, it serves as a detailed plan for investors.  

What is an Investment Thesis?

An investment thesis serves as a strategic blueprint for investors, guiding their decisions and actions by providing the rationale behind their investment choices. Typically crafted by financial analysts, portfolio managers, or investment professionals, the process begins with a thorough assessment of market potential. This involves scrutinizing trends, growth forecasts, and demand dynamics to identify opportunities. The investment thesis validates the significance of these opportunities by highlighting unmet needs or areas of dissatisfaction within the market.

Furthermore, it quantifies potential gains through meticulous financial scrutiny, including revenue forecasts and return on investment assessments. Beyond identifying opportunities, the investment thesis also plays a crucial role in managing risks by employing risk management tactics such as diversification and contingency plans, helping investors navigate market fluctuations and operational hurdles effectively.

Key Takeaways

• An investment thesis defines the criteria for profitable investments, providing a detailed plan and rationale for investors.
• An investment thesis serves as a guiding framework for investment decisions, enhancing comprehension and facilitating well-informed choices.
• Key components of an investment thesis include identifying the investment opportunity, clarifying goals, evaluating viability and risks, and assessing growth potential.

Understanding the Investment Thesis

An investment thesis is akin to a detailed plan for potential investments, often formulated by finance experts. It entails extensive research and analysis to articulate investment ideas effectively. While typically authored by professionals such as venture capitalists or private equity firms, individuals may also develop their own. This document holds significant importance in facilitating well-informed investment decisions, aiding both investors and companies in evaluating opportunities such as stocks or acquisitions.

By elucidating the reasons for investment, the thesis serves as a guiding framework for investors’ decisions. It streamlines decision-making processes, enhances comprehension of underlying rationales, and provides a means for investors to gauge the performance of their investments. Moreover, an investment thesis functions as a roadmap, charting the course toward successful investments.

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How to write an Investment Thesis

Crafting an investment thesis is essential for all investors, whether individuals or professionals. An investment thesis serves as a guide for making choices, explaining the reasoning behind decisions, and providing a framework for assessing investment opportunities. Here is a simple guide with the most important steps for crafting a good investment thesis:

Examples of an Investment Thesis

Portfolio managers and investment companies frequently share their investment strategies on their websites. Here are three examples from prominent investors:

Andreessen Horowitz

Andreessen Horowitz, often referred to as a16z, is a prominent venture capital firm established in 2009 by Marc Andreessen and Ben Horowitz. Active in the private markets, the firm invests in various sectors including AI, healthcare, consumer goods, cryptocurrency, enterprise solutions, fintech, and gaming.

Their investment strategy revolves around observing consumer trends and investing where AI intersects with consumer products. They stress the importance of developing the right AI applications to attract funding, particularly in areas like productivity enhancement and specialized tasks.

In this example, the firm explores how Moore’s Law contrasts with Eroom's Law in healthcare costs. They propose leveraging AI to cut costs and enhance outcomes by gradually integrating it into workflows. Combining AI with life sciences advancements offers transformative opportunities, advocating for a gradual transition to revolutionize healthcare and life sciences. [1]

Goldman Sachs

Goldman Sachs is a global financial powerhouse operating in major financial hubs worldwide, offering services in investment banking, IPO underwriting, securities trading, wealth, and asset management.

The bank’s investment thesis has resulted in a $1 billion investment in companies led by diverse individuals through the “Launch With GS” program aimed at supporting diverse leadership. [2] Goldman Sach collaborates with clients to invest in diverse General Partners across various strategies and offers the Entrepreneur Cohort for growth, reflecting their commitment to diversity and inclusion for achieving strong investment returns and driving industry innovation. [3]

ARK Invest provides  ETFs focused on disruptive innovation like AI and blockchain. The firm remains committed to long-term growth, leveraging innovative strategies and deep research across various sectors, including cryptocurrencies.

The Ark Invest thesis revolves around disruptive innovation, targeting transformative technologies nearing tipping points. They focus on five innovation platforms: AI, Robotics, Energy Storage, DNA Sequencing, and Blockchain. Ark Invest’s approach blends top-down and bottom-up research for early innovation capture and long-term value creation. Emphasizing high-conviction bets, long-term investment, and industry focus, Ark Invest anticipates exponential growth to benefit from technological disruptions. [4]

What should be in an investment thesis?

As an important document, an investment thesis explains why an investment opportunity is expected to be profitable. It should include key components to thoroughly analyze and guide decision-making effectively. These 7 pieces of information are indispensable:

• The Investment in Question: Identify the reason and the investment opportunity under consideration.
• Investment Goal(s): Clarify the investment's aims and aspirations by defining its objectives and goals.
• Viability of the Investment: Evaluate the investment's potential, considering any favorable trends or factors.
• Potential Downsides and Risks: Address and analyze the risks associated with the investment, highlighting any potential challenges or drawbacks.
• Costs and Potential Returns: Evaluate the financial aspects of the investment, including costs, expected returns, and potential losses.
• Alignment with Intended Goals: Ensure that the investment aligns with the overall investment objectives and strategies.
• Growth Potential: Assess the growth prospects of the investment opportunity.

What is the difference between investment thesis and investment mandate?

An investment thesis is the reasoning behind an investment strategy, based on research and analysis, helping investors make informed decisions. Conversely, an investment mandate is a set of instructions given by an investor to a manager, guiding how to manage funds according to the investor’s goals, risk tolerance, and desired outcomes. Here are the key differences:

What is a trade thesis?

A trading thesis is essentially an idea or argument made by a trader or investor about a particular financial instrument, market or asset. This process explains the reasoning behind a trading decision, considering things like market trends, economic indicators, and technical or fundamental analysis. This thesis acts as a plan for understanding the reasons behind a trade and what factors are likely to influence its outcome, aiding in making informed decisions in financial markets. Having a clear trading thesis helps traders and investors clarify their strategy and evaluate the possible risks and rewards of a trade.

Article Source

• Andreessen Horowitz: “ AI at the Intersection: The a16z Investment Thesis on AI in Bio + Health ”
• Goldman Sachs: “ Launch With GS ”
• Goldman Sachs: “ Goldman Sachs Research ”
• Ark Invest: “ Big Ideas 2022 ”  

• Investment thesis

What is an investment thesis?

Why you need a solid investment thesis, how to write an investment thesis , step one: determine your minimum viable fund size, step two: pinpoint your investment focus, step three: portfolio construction , how to present your fund thesis to lps, investment thesis example.

Breaking into the venture capital ecosystem is both challenging and competitive. Having a great investment thesis is key to running a successful VC fund. Without a clear investment strategy and effective portfolio construction , your fund won’t get very far.

In this article, we’ll cover how you can develop a strong investment thesis.

In private equity and venture capital , an investment thesis (sometimes called a fund thesis or fund strategy) outlines how you plan to use invested capital to generate returns. Your investment thesis clarifies how you’ll make money for the investors in your fund—it’s a definition of what your fund will do. 

Your investment thesis may include:

Your fund size

The number of companies in your portfolio

The stages and industries of those companies

The geographies those companies are located in

The differentiated way your fund will support your portfolio companies

Your average check size

The amount of capital reserved for follow-on investments

The return profile for your fund, based on the size of the stakes you’re trying to take in each company and your estimated success rate

How the fund will set itself apart from similarly sized or focused funds

An investment thesis tells a story by describing how each of these elements work together. 

Your fund’s investment thesis explains how you’ll cooperate with, compete with, and differentiate from other venture funds. An effective fund investment thesis is realistic and sustainable. It aligns with your investment team’s network of professional contacts (which provides access to deals), untapped opportunities in new and existing markets, and your LPs’ investment interests. 

Your fund thesis also supports compliance with the “ venture capital fund ” definition under the Investment Advisers Act of 1940 , which is important if you plan to rely on the related regulatory exemption for private funds. 

Creating your own fund investment thesis involves determining fund size, investment focus, and portfolio construction. 

The size of your fund influences almost every element of your investment strategy: The number of companies in your portfolio, your check size, the amount of reserve capital you have, and the return profile for your fund. Fund size also affects the types of LPs you attract and helps determine your fund’s portfolio management fees, which then dictate the operational expenses you can realistically support. 

Competitive research

To determine your ideal fund size, start by researching funds with goals and benchmarks like yours to see how they’re faring. You may also want to research successful funds across a handful of different industries and sectors to see what works. You can learn more information about funds by subscribing to trade publications, reading press releases from funds when they close, or on social media.

Once you’ve settled on a fund size, the next step is to outline the stage, industry, and location you’ll invest in. Articulating your investment focus helps narrow your aim and convince limited partners (LP) with interests in these sectors and stages to get on board with your strategy. It also makes it easier for founders who meet your parameters to identify your fund as a potential investor—and discourages founders who aren’t a good fit from pitching your firm.

At what point in a company’s life cycle do you want to invest and offer guidance? If you’re interested in being a sounding board for early-stage companies who are just getting started, you might want to invest at the pre-seed , seed , or Series A stages. However, if you prefer to work with companies that already have steady revenue and an established business model, you’ll probably want to focus on a later stage. 

Ultimately, the stage where you can focus your investments will be a function of your fund size and the anticipated number of companies in your portfolio. So keep this top of mind when building out your minimal viable fund size.   

Which sectors are you interested in? Do you plan to target a specific industry—like healthcare, fintech, or real estate—or focus on companies across a handful of different industries? 

Where are the companies you’ll be investing in? What particular challenges and assets do they have because of where they operate? You may choose to invest in local companies if you already have a deep network of contacts nearby. On the other hand, if you’re open to traveling, or want to capitalize on emerging, international, or underserved markets, you may want to expand your reach. This may also apply if your fund’s investment thesis is based on industry, for example, so you may be agnostic to geography. 

Other considerations

Depending on your investment goals, you might have other criteria to look at, like a company’s social impact, environmental influence, or commitment to diversity, equity, and inclusion. 

A thoughtful portfolio is critical to running a successful fund and shaping your overall investment thesis. Your strategy for portfolio construction signals to LPs how you plan to allocate their capital across investments. Your fund’s investment portfolio is essentially the roadmap for the life of the fund. It spells out the number of companies you’ll invest in, the amount of capital you’ll pour into each company, your target ownership for each company, how much you’ll set aside for initial investments, and how much you’ll reserve for follow-on investments.

Portfolio construction is made up of the following elements: 

Investment focus

Diversification: Types of companies you’ll invest in and what percent of the fund will be for non-qualifying investments or investments outside the thesis

Check size: The amount you’ll invest in each company

Investment horizon: How long you have to allocate the capital and how long you’ll hold each investment

Expected returns: How much you expect to return on the capital invested

Investor requirements: Maximum or minimum contributions

A good rule of practice is to ensure that your investments align with your portfolio construction model before making each investment decision, and then actively thereafter. Set aside time to regularly evaluate whether your investments align with your model, and where to course-correct. If your investments deviate from your original thesis, you’ll need to adjust your model or reset your focus. This is particularly important to track if you include a specific investment thesis in your fund’s legal documents.

Learn more about how to create a portfolio construction strategy

Most VCs prepare versions of their fund thesis that go into different levels of detail, ranging from a one-sentence elevator pitch, like the example below, to a full pitch deck.

You should be able to sum up your fund strategy in one or two straightforward sentences. Here’s an example investment thesis from a hypothetical venture fund:

“Krakatoa Ventures is raising a $25 million seed fund to back U.S.-based startups focused on climate technology and earth sciences. The fund will capitalize a highly specialized network of climate scientists the general partners developed during their two decades of academic study in volcanology and climatology.”

→Ready to make a full pitch deck for LPs? Prepare for your next meeting with investors using our free pitch deck template and example pitch decks .

This example highlights a key aspect of a great fund strategy: It shouldn’t be a thesis that just anybody can go out and execute. Your edge, such as your personal experience and network, are integral parts of the plan. Articulate why you’re better positioned than anyone else to execute your investment thesis.

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Investing for financial return is only part of the equation.

How to Create an Investment Thesis [Step-By-Step Guide]

Updated on June 13, 2023

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One of the worst mistakes an investor can make is to sink their money into an investment without knowing why. While this may seem like the world’s most obvious mistake to avoid, it happens every day. Look no further than the stock market for plenty of examples of misguided optimism gone terribly wrong.

That’s where the idea of an investment thesis comes in. An investment thesis is a common tool used by venture capital investors and hedge funds as part of their investment strategy.

Most funds also use it on a regular basis to size up potential candidates during buy-side job interviews. But you don’t have to work at a venture capital fund or private equity firm to reap the benefits of creating an investment thesis of your own.

Table of Contents

What Is an Investment Thesis?

Materials needed to create a thesis for your investment strategy, a step-by-step guide to creating a solid investment thesis, step 1: start with the essentials, step 2: analyze the current market, step 3: analyze the company’s sector, step 4: analyze the company’s position within its sector, step 5: identify the catalyst, step 6: solidify your thesis with analysis, free tools to help strengthen your investment strategy.

An investment thesis is simply an argument for why you should make a specific investment. Whether it be a stock market investment or private equity, investment theses are all about creating a solid argument for why a certain acquisition is a good idea based on strategic planning and research.

While it takes a little more work upfront, a clear investment thesis can be a valuable tool for any investor. Not only does it ensure that you fully understand why you’re choosing to put your hard-earned money into certain stocks or other assets, but it can also help you develop a long-term plan.

Should an investment idea not go as planned, you can always go back to your investment thesis to see if it still holds the potential to work out. By considering all the information your thesis contains, you’ll have a much better idea of whether it’s best to cut your losses and sell, continue holding, or even add to your position.

An investment thesis includes everything you need to create a solid game plan, making it a foundational part of any stock pitch.

See Related : Best Socially Responsible Stocks To Invest In Today

One of the benefits of an investment thesis is that it can be as complex or as simple as you like. If you actually work at a venture capital firm , then you may want to develop a full-on venture capital investment thesis. But if you’re a retail investor just looking to solidify your investment strategy, then your thesis may be much more straightforward.

If you’re an individual investor, then all you really need to create an investment thesis is somewhere to write it out. Whether it be in a Google or Word doc or on a piece of paper, just make sure you have a place to record your thesis so that you can consult it down the line.

If you’re developing a venture capital investment thesis that you plan to present to an investment committee or potential employers, then there are plenty of great tools online that can help. Slideteam has thousands of templates that can help you create a killer investment thesis , as well as full-on stock pitch templates.

As mentioned earlier, an investment thesis holds the potential to help you plot out a strategy for pretty much any acquisition. But for the sake of simplicity, we’ll assume throughout the examples in the following steps that you’re an investor interested in going long on a stock that you plan to hold for at least a few months or years.

Venture capitalists looking to invest in companies or startups can also apply the same principles to other investment goals. Investors who are looking to short a certain stock should also be able to use these techniques to locate potential investments. The main difference, of course, is that you’ll be looking for bad news instead of good.

First things first. Before you get into doing the research that goes into an investment thesis or stock pitch, make sure you take the time to write out the basics. At the top of the page, include things like:

• The name of the company and its ticker symbol
• Today’s date
• How many shares of the company you already own, if any
• The current cost average for any shares you may already hold
• Whether the stock pays dividends and, if so, how often. You may also want to include the current ex-dividend and dividend payment dates.
• A brief summary of the company and what it does

See Related : How to Start Investing With Purpose

Now it’s time to take a look at the entire market and the direction it’s headed. Why? As Investors Business Daily points out,

“History shows 3 out of 4 stocks move in the same direction as the overall market, either up or down. So if you buy stocks when the market is trending higher, you have a 75% chance of being right. But if you buy when the market is trending lower, you have a 75% chance of being wrong.”

While the overall market direction is definitely an important factor to keep in mind, what you choose to do with this information will largely come down to your individual investing style. Investors Business Daily founder William O’Neil advised investors only to jump into the market when it was trending up.

Another approach, however, is known as contrarian investing, which revolves around going against market trends. Warren Buffett summed up the idea behind this strategy with his famous quote, “Be fearful when others are greedy, and greedy when others are fearful.” Or as Baron Rothschild more graphically put it, “Buy when there is blood in the streets, even if the blood is your own.”

Most investors who are looking for a faster return will likely be better off waiting to strike until the iron is hot. If you align more with the long-term contrarian philosophy, however, bleak macroeconomic outlooks may actually strike you as an ideal investment opportunity .

See Related: How to Invest in Private Equity: A Step-by-Step

Now that you’ve got a look at the overall market, it’s time to take a look at the sector your company fits into. The Global Industry Classification Standard (GICS) breaks down the entire market into 11 sectors. If you want to get even more specific, you can further break down companies into the GICS’s 24 industry groups, 69 industries, and 158 sub-industries.

Once you identify which group your company belongs to, you’ll then want to take a look at that sector’s performance. Fidelity provides a handy breakdown of the performance of various sectors over different time periods.

But why does it matter? Two reasons.

• Identifying which sectors various companies belong to can help you ensure that your portfolio is properly diversified
• The reason that sector ETFs tend to be so popular is that when a sector is trending, many of the stocks within that sector tend to move in unison. The reverse is also true. When a certain industry is lagging, the individual stock prices of the companies in that industry may be affected negatively. While this is not always the case, it’s a general rule of thumb to keep in mind.

The idea behind working sectors into your investment criteria is to give you an overview of what type of investment you’re about to make. If you’re a momentum trader, then you may want to shoot for companies within the strongest-performing sectors this year or even over the past few months.

If you’re a value investor, however, you may be more open to sectors that have historically experienced high growth, even if they are currently suffering due to the overall state of the economy. Some speculative investors may even be interested in an innovative industry with strong potential growth possibilities, even if its time has not yet come.

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If you want to up your odds of success even more, then you’ll want to compare the company you’re interested in against the performance of similar companies in the same industry.

These are the companies that tend to get the most attention from large, institutional investors who are in a position to significantly increase their market value. Institutional investors tend to have a huge amount of money in play and are far less likely to invest in a company without a proven track record.

When choosing an investment, they’ll almost always go with a global leader over a new business, regardless of its promise. However, they also consider intrinsic value, which considers how much a company’s stock is selling for now, as opposed to how much revenue the company stands to earn in the future. In other words, institutional investors are looking for companies that are stable enough to avoid surprises but that also stand to generate considerable capital in the future.

Why work this into your game plan? Because even if you don’t have millions of dollars to invest in a company, there may be hedge funds or venture capital firms out there that do. When these guys make an investment, it tends to be a big one that can actually move a company’s share price upward. Why not ride their coattails and enjoy a solid growth rate as they invest more money over time into proven winners?

That’s why it’s important to make sure that you see how a company stacks up against its closest competitors. If it’s an industry-leading business with a large market share, it’s likely to be a strong contender with solid fundamentals. If not, you may end up discovering competing companies that make sense to consider instead.

See Related : What is a Triple Bottom Line? Definition & Examples

At this point, hopefully, you’ve identified the best stock in the best sector based on your ideal investing style. Now it’s time to find out exactly why it deserves to become a part of your portfolio and for how long.

If a company has been experiencing impressive growth, then there’s bound to be a reason why.

• Is the company experiencing a major influx of business because it’s currently a leader in the hottest sector of the moment? Or is it a “good house in a bad neighborhood” that’s moving independently of the other stocks in its industry?
• How long has it been demonstrating growth?
• What appears to be the catalyst behind its movement? Does the stock owe its growth to strong management, recent world events, the approval of a new drug, the introduction of a hot new product, etc?

One mistake that far too many beginning investors make is assuming that short-term growth alone always indicates the potential for long-term profit. Unfortunately, this is not always the case. By figuring out exactly why a stock is moving, you’ll be far better positioned to decide how long to hold it before you sell.

A strong catalyst can cause the price of a stock to skyrocket overnight, even if it’s laid dormant for years. Even things like social media hype and rumors can cause a stock’s price to shoot up over the course of a given day. But woe to the investor that assumes these profits will last. Many are often left holding the bag when the price increase turns out to be part of a “ pump and dump .”

While many day traders can make a nice profit by capitalizing on these situations, such trades are best avoided altogether if you plan to hold a stock long-term. That’s why it’s so important to understand whether a stock is “in play” for the day or whether its growth can be attributed to more permanent factors that support the potential for a high return over time.

See Related : How to Become an Impact Investor [Step-By-Step Guide]

If you’re planning on investing a significant amount of capital in any stock, then a little research may be able to save you from a lot of heartache. Keep in mind that the focus of an investment thesis is to formulate a reasoned argument about why adding an asset to your portfolio is a good idea.

While all investments come with some level of risk, research can be an excellent risk mitigation strategy. There’s nothing worse than watching an investment fail due to an obvious factor you could have spotted with closer analysis. Don’t let it happen to you!

Fundamental analysis can help you ensure that your potential investments have the underlying traits that winning stocks are made of. While there’s a bit of a learning curve involved when you’re first starting out, here are some of the things you’ll want to focus on:

EPS stands for “earnings per share.” It’s a common financial indicator that basically tells you how much a company makes each time it sells a share of its stock. In this regard, a higher EPS is a good thing, but it’s important to look for solid EPS growth over time. Ideally, you’ll want to see consistent growth in a company’s EPS over the past three or more quarters.

Sales and Margins

Investing is all about putting your cash into successful companies, which is why sales and margins are key components to finding worthy investments. Sales indicate how much a business has made from (you guessed it) sales. Sales margin, also known as gross profit margin, is the amount of revenue a company actually gets to keep after you factor in overhead and other production costs. Ideally, a good investment will exhibit strong, consistent sales growth in recent years.

Return On Equity (ROE)

ROE is one of the more commonly used valuation metrics and is calculated by dividing the company’s net income/shareholders’ equity. ROE is basically a measure of how efficiently a company is using the capital it generates from equity fundraising to increase its own value. The higher the ROE, the more likely it is that a company operates with a focus on using its cash flow to increase its profits.

See Related : How to Do a Stakeholder Impact Analysis?

While these are just a few examples of various analysis methods to work into your investment thesis, they can go a long way toward locating solid companies worth investing in. Interested in learning more about technical and fundamental analysis? There are now plenty of great sites that can help you master the secrets of the training world.

In our opinion, Tradimo is one of the most underrated, as it provides tons of free classes for investors of all levels. Udemy also has some great classes that can help you learn how to beef up your investment thesis with as much quality information as possible.

But keep in mind that these are only suggestions. The most important part of any personal investment thesis is that it makes sense to you and can serve as a valuable tool to help you along your investing journey.

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• Best Impact Investing Online Courses
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Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.

Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.

Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.

When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.

Investment Thesis: Definition, Components and How to Prepare One

Last updated 03/15/2024 by

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What is an investment thesis, the role of an investment thesis in investment decision-making, tailoring your investment thesis to your financial goals, components of a strong investment thesis, market research and analysis, target investment criteria, risk assessment and mitigation, expected returns and exit strategy, alignment with your risk tolerance and time horizon, building your investment thesis, conducting comprehensive market research, defining your investment objectives, selecting the right assets or securities, creating a clear investment strategy, addressing potential risks, implementing your investment thesis, portfolio diversification, monitoring and reviewing your investments, adapting your thesis to market changes, tracking progress towards your goals, evaluating the success of your investment thesis, measuring performance against initial projections, identifying key milestones, learning from both successes and failures, what is the difference between an investment thesis and a strategy, how often should i revisit and adjust my investment thesis, can i have multiple investment theses for different investment goals, what should i do if my investment thesis is not yielding expected results, key takeaways.

• An investment thesis is a crucial tool for guiding your investment decisions and achieving your financial goals.
• Building a strong investment thesis involves in-depth research, clear objectives, careful risk assessment, and alignment with your risk tolerance and time horizon.
• Implementing your thesis requires portfolio diversification, monitoring, adaptation to market changes, and tracking your progress.
• Regularly evaluate the success of your investment thesis by measuring performance, identifying milestones, and learning from your experiences.

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Writing a Credible Investment Thesis

by David Harding and Sam Rovit

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis . The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business." 10

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29 percent of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40 percent had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83 percent of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. 11 In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. 12 They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much." 13

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark, and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors, and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal . Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage-can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.–based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. 15 The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3 percent of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.

The dilution/accretion debate . One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate . We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares, or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20 percent return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15 percent a year. Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level. 16

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." 17 Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

[ Buy this book ]

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

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How to Write an Investment Thesis

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NASDAQ: DUOL

Plus, a look at "one of the most obvious long-term trends out there" and more.

In this podcast, Motley Fool analyst Jason Moser discusses:

• Recognizing short-term catalysts.
• Why home improvement is "one of the most obvious long-term trends out there."
• Travel and return-to-work are two trends worth watching.

Then, using language-learning app Duolingo ( DUOL 0.92% ) as an example, Motley Fool analyst Alicia Alfiere shares key questions to ask when writing an investment thesis, including:

• What are its competitive advantages?
• Who's running the company?
• Will broader trends help or hurt?
• Stocks discussed: BKNG ( BKNG 1.53% ) , HD ( HD -0.36% ) , LOW ( LOW -0.82% ) ,  MSFT ( MSFT 0.09% ) , and DUOL.

To catch full episodes of all The Motley Fool's free podcasts, check out our  podcast center . To get started investing, check out our  quick-start guide to investing in stocks . A full transcript follows the video.

10 stocks we like better than Duolingo, Inc. When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now… and Duolingo, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 3, 2022

This video was recorded on March 7, 2022.

Chris Hill: Tell the DJ to queue up ZZ Top because we're talking about investing trends with legs. Motley Fool Money starts now. I'm Chris Hill joined by Motley Fool senior analyst Jason Moser. Thanks for being here.

Jason Moser: Hey, thanks for having me.

Chris Hill: Everybody loves a good trend, right?

Jason Moser: Sure.

Chris Hill: We're investors, we love a good trend. Lately, I don't know if you've noticed as the market has continued its grim slide of 2022, that doesn't stop potential trends from emerging here or there. I wanted to talk with you about how to figure out which trends have legs and which ones don't. I'll just start with an example of one that I think for me anyway, doesn't really have legs, and it goes under the umbrella of because of reasons, this industry has sold off tremendously. Therefore, it presents an opportunity for investors because it's trading below where it should be. The one that leaves to mind for me that's come up several times over the past two plus years is the Cruise Industry, and that may be a good short-term opportunity for some people. I'm not interested in that.

Because it's not an industry that I think has great long-term tailwinds behind it, I don't mean to pick on the Cruise Industry, but you know what I'm talking about. There are some trends that get a lot of attention, but it's for short-term reasons.

Jason Moser: Yeah, I'm glad you said short-term reasons because I agree with what you're saying. I think the way I typically try to break this down in my own mind, and I've talked before about the way that I invest. As a long-term investor, someone who typically like to be a net buyer of stocks, I'd like to buy, I don't really like selling. Typically I am looking for companies that I feel they're going to be relevant for decades. Figuring out and following the long-term trend in differentiating that between what I would call a short-term catalyst, and so I think that the Cruise example there is a good example of something where there's a short-term catalyst. Before 2020, I don't know that Cruise ships were really a place where I was interested in investing, it sounds you feel the same way. It's just not an industry that you're all that interested in. I think that's how I start to at least look at this, because you could look at the Cruise liners for example, and say, "well, I'm not all that interested." But by the same token, it does feel there's a short-term catalysts in place that could result in value for shareholders if things continue to improve. The travel industry in general has been shellacked, but things are starting to come back.

There were a lot of questions early on in 2020 as to whether these major Cruise liners would even survive. They did a good job, I think of figuring out ways to survive and keeping their balance sheets in working order there, but I think for me, you see the benefit of a reopen and then say, alright, Cruise liners could benefit from that, the stock's been may start to reflect that optimism. But beyond that short-term catalyst, is there something there? Do you see more people clamoring to go on cruises as the years go by? I'm not convinced that's the case. I think it's a relevant industry. I think there are people who love to take cruises, but I think there are also a lot of risks that come with something like that. For me, it's trying to think about what direction the world is headed and I'll be honest with you, I'm sure you probably can relate to this as a parent. I looked at my kids, I have two daughters, they're are at sophomore junior and high school. I looked at them and their friends and what they're doing, what they're watching, the apps that they're using, ways that they're conducting their business, that to me starts to tell a little bit more about consumer behavior, trends that may be forming, things that matter to younger generations that will continue to matter even as they get older. I typically try to break it down between looking at a long-term trend versus a short-term catalysts in figuring out ways to discern between the two.

Chris Hill: If you think back to last year in the late spring, one of the big trends getting a lot of attention was what was referred to as the great reopening.

Jason Moser: Yeah.

Chris Hill: It seems we're at that point again, as Omicron levels continue to drop, vaccines continue to rise, more and more businesses, we talked about this last Friday on Motley Fool Money about some of the biggest tech companies in America opening up their offices, mask mandates coming down. You were talking to the folks at Cheddar, and I'm happy to share Jason Moser as a resource our with media outlets. [laughs] You're welcome Cheddar. But seriously, you were talking to them about this trend, weren't you?

Jason Moser: Yeah, we were talking about reopening, and to me it feels like reopening 2.0. We did go through a reopening before, where I think a lot of us are starting to get back out there and resuming somewhat normal behavior. This is the next iteration of that, where I think the wall start to come down and even more people start to go out and really get their lives back to normal. We were talking about ideas, investments, companies that will benefit from this next phase of reopening, and then what future they may have even beyond that, because I would look at reopening as definitely a short-term catalyst. This is not something where the long-term trend is for our economy to reopen, and so for me that doesn't mean that there aren't great ideas out there, that doesn't mean there's no money to be made, but by the same token, and I think, we said this a lot when we were talking about the stay at home stock, theme that we were delving into a couple of years ago. 

You want to make sure that regardless, these are businesses that you feel will continue to do well even beyond the short-term catalysts. Because this short-term catalyst will end, and then you want to make sure that you're not left holding the bag with the business that maybe isn't going to continue to benefit beyond just that catalyst. For me, there are a lot of different ways you can look at the companies that will benefit from this. I mean, you're talking about incremental traffic in all places, people going back to work, office buildings getting busier, the areas around the office buildings getting busier, malls getting busier, so what companies can you expect a benefit there? To me, there are a lot of different ways you can look at it. I think travel is one that stands out immediately just because so many people are ready-to-go do something. We saw some of the snap-back in travel earlier through the course of this last couple of years, but it does look things continue to get even better. 

I was looking through Booking Holdings, for example their most recent earnings call, they were talking about the fact that they are seeing the trends continuing to move in the right direction. They said the first half of February they saw meaningful improvement across all of their regions compared to January, but then they made this reference to gross bookings. They said gross bookings for the summer are higher than they were at this time in 2019, so that's encouraging for a number of different reasons and it sounds a lot of people are planning trips. I know that we are both planning to get a trip and I'm going to be going a few places here over the summer as well looking forward to that. But when you think about just the fact that gross bookings for the summer are higher than they were at this time in 2019, that's really encouraging. The nice thing about travel is it's truly a global opportunity. I think travel is going to continue to be a long-term trend that investors can benefit from, so Booking Holdings stands out as one way to look at this reopen 2.0.

Chris Hill: It is interesting. The difference, as you said, the long-term trend versus the short-term catalysts, because ultimately there has to be something sustainable. There has to be something about an underlying business that we as investors can see a pathway for growth. Which, and this may be just my preference, I always prefer organic growth as opposed to growth through acquisition. It's not to say that that doesn't work, there are plenty of businesses that have rewarded shareholders by going the route of acquisition. But to me, it's just preferable to see a business like I've talked before about Home Depot and Lowe's, and not that they do a tremendous amount of increasing their store count year-over-year, but you look at the way that they've grown out their online presence, their deliveries, that sort of thing, that's just easier for me to wrap my head around.

Jason Moser: Well, yeah. I think Home Depot and Lowe's, two very good examples of businesses that I think could certainly benefit here over the next several months as consumer traffic continues to pick up. We've seen the strength in the housing market over the past couple of years, and the neat thing about housing is whether you own or you rent, home improvement maintenance, all that stuff is always on the table. That's to me one of the most obvious long-term trends out there, because everybody needs a roof over their head. You look at Home Depot and Lowe's, the quarters that they just chalked up, to be able to maintain their gross margins in a time like this when inflation really is front and center, Lowe's actually expanded their gross margin very modestly. Home Depot, a little bit of pressure, but overall they've really been able to maintain prices very well and passes these costs along to consumers.

I think part of that is just due to the nature of the market that it serves, it's a necessary market. Then they love to throw the statistics out there, 50 percent of the homes here in the US are over 40 years old. A lot has changed in 40 years. The ways that we build houses, the ways that we've repair our homes and update and improve our homes. What that ultimately means is you get this massive installed housing base out there just in this country alone, that really requires a lot of what Home Depot and Lowe's are selling. They may not be the sexiest names in the world, and they may not like the world on fire in the near-term, but when you stretch the chart out, if you look at the way these companies performed through the years, 3, 5, 10 years, they are just tremendous performers. Lowe's in particularly, you look at what Marvin Ellison has done there, that has been just nothing short of spectacular. I think what we've got now is really two businesses there in Lowe's and Home Depot that you and I have likened before to MasterCard and Visa . It's almost like a which one should I pick? Why bother choosing? You could actually own both and get away with it just fine. It's not a bad idea, actually.

Chris Hill: Not a bad idea at all. Last thing and then I'll let you go. When you think about long-term trends, I suppose there are a couple of different ways you can think about them. One is to try and predict where the future is going and be right, not only about the direction, but the timing of how soon we're going to get there. I was on David Gardner's Rule Breaker investing podcast recently and on an episode that were set in the year 2052 and one of the jokes we made on that was that self-driving cars, still not a thing [laughs] and it may not be by the way. That's one way to do it, like OK, this is where the world is going. But another way to do it is to look at trends right now and say, OK, do I think this is going to be here in 20 years? You can say that about individual products, you can also say that about industries. It's why whenever someone has a new baby and he's like, I want to buy a stock for them. My answer is always Starbucks. Because I know that the way we drink coffee in 50 years is going to look a whole lot like the way we drink it now.

Jason Moser: [laughs] If it looks any different, Starbucks is probably going to be one of the companies that is innovating and iterating there. So you probably win either way. Yeah, I think to me, one of the trends that I think it's front and center right now for a lot of people is work, exactly how we're going to be working. We're talking about stay at home, now we're talking about reopen. It's been a weird two years. There're offices that never closed down and then there are other offices that just have closed down completely and you wonder what exactly the future holds. I look to a business like Microsoft, for example, and I think it's very telling that you've got a lot of these big tech companies that are reopening their offices. They're eager and excited to do that, and I think that's for a number of reasons. I think that you've seen some of the CEOs of these businesses, Twitter for example, they're talking about the fact that, yes, remote work is available, but it is harder. It makes things a lot more difficult. I'm sure probably you run into some challenges where remote work does make things harder. 

But by the same token, there are a lot of folks that like that, convenience in being able to go do what they want to do when they want to go do it, it certainly expands that work schedule. For me, I look at the absolutes as being probably what you want to avoid. If you're saying, well, we're just going to be a virtual-only company, you're probably leaving something on the table there. But if you say that, well, everybody has to be at the office all the time, well, you're leaving some talent out there that you might not be able to get otherwise. To me, the hybrid work environment, that's what seems like the future holds. You look at a company like Microsoft , a company that's responsible for getting so many of those tools that we've been able to use, whether you're Slack or Zoom or Microsoft Teams, Microsoft Teams and all of the tools that Microsoft provides, they help enable what ultimately I think we're going to see is the hybrid work environment where a lot of folks have the opportunity to do it however they want to do it, but companies still have a process and a philosophy in place that leaves everybody feeling included. I think that's probably one of the bigger challenges. I think that's going to be one of the things that companies will figure out as time goes on, is managing the remote and the physically present workforce together. Not saying that's an easy thing to do, but I think that's going to be something that companies are going to have to do. Because to me, again, it feels like you've take it to the extreme, if you go absolutes one way or the other, that to me seems to open up more challenges of opportunities the longer you play that out.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: Remember back in high school when your English teacher taught you how to write a thesis statements, it's the main idea of your essay and you are not going to get an A without a strong thesis statement. It turns out that's one of those skills that comes in handy for investors like you and me. Here to talk through the nuts-and-bolts of an investment thesis is Motley Fool Senior Analyst, Alicia Alfiere. Thanks for being here.

Alicia Alfiere: Thanks for having me.

Chris Hill: Before we get into some of the key questions that can go into an investment thesis. Why do you think an exercise like this is helpful for us as investors?

Alicia Alfiere: First, when we think of an investment thesis, it's really a summary of what you think of the company and why you think it makes a good investment case, as well as some of the risks. It's really important, particularly now when we are seeing a lot of market volatility. The idea here is that I will help you cut through all the noise of that market volatility and focused on signals for your company and hopefully stop you from selling a company that's actually pretty good.

Chris Hill: I know that you've been using Duolingo, let's use that as an example here, and some of the key questions that people can ask when they are looking to build an investment thesis for any business, for any stock and it starts with really knowing the company.

Alicia Alfiere: This one sounds like a no-brainer, but there are actually companies out there that require a little bit extra time and research to be able to answer questions like, what does this company sell? Do? What problem are they solving? Who are their customers? How do they make money? That's really fundamental to understand. If we use Duolingo as an example here, Duolingo is a global mobile learning platform with the mission to develop the best educational content in the world and make it universally available. They offer a gamified approach to learning over 40 languages and they offer a lot of different solutions here. They have their flagship Duolingo Learning Language App, which is free. They have Duolingo Plus, which is a subscription. Duolingo English Test, which is a proficiency exam, and Duolingo for Schools. Essentially the problem that they're solving here, is making education accessible to the mobile generation and their lessons are pretty effective. According to their internal study, users with five Duolingo units were as proficient in reading and listening as students with four college semesters of language classes. Then in terms of how do they make money, again really important to understand. They make most of their money from their subscription products. The rest comes from the Premium Apps, so those are based revenues and revenues from their English tax.

Chris Hill: Every business has competition, so obviously it is worth spending a minute or two when you're putting together an investment thesis thinking about competitive advantages that a business might have.

Alicia Alfiere: Look at the competition within the industry. Is there a product or service sticky? Does the business have network effects? When we talk about network effects, think of a platform like Facebook. Where you have this virtuous circle of data which makes your users use it more, which brings in more data, which allows you to get more insights, [laughs] which again makes that product even more valuable. In terms of Duolingo they are in a highly competitive industry. Lots of options to learn new languages, whether it's a virtual or in-person classes, other apps and websites and there is substitution items that you could use as well like translator apps. But what advantages does Duolingo have? They have a strong brand, they have had over 500 million downloads and their flagship app is the top grossing app in the education category on Google Play and the Apple App Store. This strong brand recognition really helps to drive organic growth for them. 

They also have strong network effects so 41.7 million monthly active users, which includes a US contingent that actually out numbers. Total US high school foreign language learners which a massive amount here. They have over a half billion exercises completed daily on the platform and as a result of that strong network, Duolingo beliefs, they have the largest collection of language learning data, and they feed this virtual cycle of their network by using their collection of data, to make learning experiences more efficient and differentiated for its users. In terms of platform stickiness, over 50 percent of daily active users have used the app for more than seven days in a row, and one million users have an active stretch of longer than 365 days. Pretty impressive there, but there are some tricky parts here for paid subscribers, it's a bit more complicated. About 40 percent of annual subscribers renew their subscriptions after a year or about nine percent of monthly subscribers renew their subscription after one year. They got some work to do here.

Chris Hill: At the Motley Fool, we're not just interested in the business, we're interested in the management as well. It's worth spending time figuring out, hey, who are the people running this business?

Alicia Alfiere: Absolutely. Take a look at who are the co-founders, who is leading the Company? Do they have a long-term vision? What's their culture like? Remember their employees are what make a vision come to life. If employees don't buy in, it's going to be really hard for a company to grow. For Duolingo, it was founded by Luis von Ahn and Severin Hacker, two engineers who met at Carnegie Mellon. Luis is the CEO and Director, Severin is the CTO and Director. They're both heavily involved in the company, which we really like. For Luis growing up in Guatemalan, he saw how access to education can truly transform lives and when he met his kindred spirit in Safran the two embarked are creating an accessible, effective, and intelligent learning solution. While they started with languages, their long-term goal is to have language learning be just one of the education solutions that they offer. They've already started along this path. They have their Literacy App, Duolingo ABC, which teaches children how to read and they're working on an app to teach elementary school math. For culture, I like to look at website like Glassdoor to see what employees think. Do they like working there? Are they dedicated to vision? On Glassdoor, 93 percent of employees would recommend Duolingo to a friend and 97 percent approve of the CEO, so pretty solid results here.

Chris Hill: We say all the time investing is about the future. At some point when you're putting together an investment thesis, you got to check a couple of boxes in terms of what does the future look like for this business?

Alicia Alfiere: Yes. Think about the future. What's the market opportunity for them? Can they grow? How can they grow? Are there any broader trends that can help or hurt the company in the future? For Duolingo, they're a player in a growing market, the mobile learning space. Preferences for convenience, an on-demand services have driven a lot of consumers toward mobile solutions. Whether it's shopping or learning, and COVID accelerated the usage for mobile learning. Though the growth will probably edge away from some of that COVID highs, it's still expected to grow. Global language learning spending both online and offline, reached 61 billion in 2019 and is projected to grow to 115 billion by 2025. Within this market, online learning is growing fast. From 12 billion in 2019 to 47 billion in 2025. Perhaps the convenience and flexibility of mobile learning, as well as smartphone adoption overall, is broadening the demand for that language learning products. Since Duolingo's annual revenues were about 161 Million in 2020, they're only about 1.3 percent of the current market for online language learning, which gives them a ton of room to grow. They have a plan to grow, which is really important. They think that they could grow by increasing the number of users, converting free users to those paid subscription users, increasing subscription stickiness, which we already talked about, and expanding their solutions, beyond that language learning.

Chris Hill: We want to be bullish when we're thinking [laughs] about stock that we're considering adding to our portfolio. But at some point you have to put on the bare hat and think about what are the risks to this business?

Alicia Alfiere: Because every investment has risks, that's the nature of the beast and if you can't find one, you need to research more. Be curious, play the part of the skeptic and ask, what could go wrong. This is especially important in times of market volatility. For Duolingo, we already talked about some of the issues that they have here. Operating in a highly competitive environment and subscription retention numbers that could be better. But there's also another issue we didn't talk about, and that's low switching costs. What that means that it doesn't really cost a lot of money and it's not a huge hassle for users to simply change apps, or take in person costs instead and so that is another risk.

Chris Hill: You've clearly put in some work on Duolingo, tell me how the story ends. Is this stock you're adding to your portfolio or is it on your watchlist for right now?

Alicia Alfiere: Well, right now it's more on my watchlist. At the end of this process, what I like to do is summarize and actually, hey, what would the investment thesis look like? In this case, I would say Duolingo has gamified approach to learning, which has helped the company build a strong brand and benefit from strong network effects in some platform stickiness. With these competitive advantages, strong tailwinds from online education trends, a large market to expand into, and a plan for expansion, Duolingo is an intriguing company by subscription retention statistics and those low switching costs give me a bit of a pause for right now. I'm going to continue to follow them and research them because I find this company fascinating and a really value leadership's vision and plans for the future.

Chris Hill: Do you've more information about putting together your own investment thesis in our show notes. So check those out when you get a chance. Alicia Alfiere, thanks so much for being here.

Chris Hill: That's all for today, I will be coming up tomorrow, three analysts share some of the biggest investing lessons that they've learned over the past 20 years. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

Alicia Alfiere owns Microsoft. Chris Hill owns Home Depot, Lowe's, Microsoft, Starbucks, and Visa. Jason Moser owns Booking Holdings, Mastercard, Starbucks, and Visa. The Motley Fool owns and recommends Booking Holdings, Home Depot, Mastercard, Microsoft, Starbucks, Twitter, and Visa. The Motley Fool recommends Lowe's and recommends the following options: short April 2022 $100 calls on Starbucks. The Motley Fool has a disclosure policy .

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Investment Thesis: An Argument in Support of Investing Decisions

October 29, 2023 by Abi Tyas Tunggal

An investment thesis is a well-reasoned argument that supports a specific investment decision, playing a vital role in the strategic planning process for individual investors and businesses alike. It comprises detailed research and analysis to evaluate an investment's potential profitability. A good investment thesis serves multiple purposes, including helping in the decision-making process, providing a comprehensive framework for monitoring and assessment, and offering a structured approach to identifying potential opportunities.

There are different types of investment strategies, such as venture capital , private equity, and long-term value investments. The core of an investment thesis involves identifying key parameters for evaluating an investment, understanding the unique market dynamics and competitive landscape, and realizing how to create value through strategic planning. To ensure a comprehensive and detailed investment thesis, it is crucial to involve thorough research, considering emerging trends and opportunities, and incorporating industry case studies for better understanding. Ultimately, financial statements and valuation metrics play a significant role in determining a well-suited investment decision.

Key Takeaways

• An investment thesis is a well-reasoned, research-based argument supporting a specific investment decision
• There are several types of investment strategies, and a well-structured investment thesis addresses market dynamics and competition to create value
• Research, valuation metrics, and understanding emerging trends are crucial in crafting a compelling investment ideas

Defining an Investment Thesis

An investment thesis is a well-structured, logical argument that justifies a particular investment decision, based on thorough research and analysis. It is essential for investors, as well as financial professionals in the domains of investment banking, private equity, hedge funds, and venture capital funds . A confident and knowledgeable investor will build out clear investment criteria to successfully navigate the investment landscape.

The primary purpose of an investment thesis is to outline the reasons and expected outcomes of a proposed investment, often focusing on the potential for growth and profit. This document offers a roadmap for investors, guiding them through their decision-making process, and helping to ensure that they arrive at rational and informed conclusions. A comprehensive investment thesis should consider various aspects, such as market conditions, competitive landscape, and financial performance of the targeted asset or company.

A strong investment thesis is built on rigorous market research and analysis. This involves evaluating historical and current financial information, as well as scrutinizing industry trends and the overall economic environment. Skilled investors will also incorporate their expertise in the industry to better assess the merits of an investment opportunity. This level of thoroughness creates a confidently expressed thesis, allowing investors to remain steadfast in their investment decisions, even amid market volatility.

In summary, an investment thesis plays a pivotal role in the investing process. It presents a well-reasoned argument, grounded in extensive research and clear analysis, that supports an investment decision. Crafting a robust investment thesis is crucial for both individual and institutional investors as it provides a solid foundation for investment choices and ensures the alignment of investment strategies with long-term objectives.

Importance of Research in Crafting an Investment Thesis

Thorough research is a crucial aspect of creating a solid investment thesis. It allows investors to gather vital information and insights that will help guide their investment decisions. There are several elements to consider while conducting this research, with data analysis, understanding risks, and returns being essential components.

Data Analysis

Data analysis forms the backbone of any research conducted for crafting an investment thesis. It involves collecting, organizing, and interpreting various types of data, such as financial statements, market trends, and industry forecasts, to identify patterns and make informed predictions about a potential investment opportunity. A comprehensive data analysis can help investors make confident choices based on reliable information, which is essential for a successful investment strategy.

Some key data analysis techniques used in crafting an investment thesis include:

• Comparative analysis: Comparing the performance of different companies within the same industry to identify investment opportunities.
• Trend analysis: Monitoring historical data to determine patterns and potential future developments.
• Financial statement analysis: Examining the financial health of a company through its balance sheets, income statements, and cash flow statements.

Understanding Risks and Returns

One of the primary goals of research in developing an investment thesis is to assess the risk/reward profile of a potential investment. This involves evaluating the potential risks associated with the investment and weighing them against the expected returns. A sound investment thesis should demonstrate a clear understanding of these risks and offer a rationale for why the investment’s potential returns make it a worthwhile addition to a portfolio.

Some common risks to consider when crafting an investment thesis include:

• Market risk: The risk of an investment losing value due to fluctuations in the market.
• Credit risk: The risk that a company or issuer of a financial instrument may default on its obligations.
• Operational risk: The risk of losses arising from failed internal processes, systems, or personnel within a business.

Evaluating these risks requires investors to develop a deep understanding of the investment opportunity, its industry, and the factors that may impact its performance. A diligent and systematic approach to research can help investors identify potential risks and gains, leading to informed and confident decision-making in crafting a strong investment thesis.

Types of Investment Strategy

When it comes to crafting an investment thesis, selecting an appropriate investment strategy is crucial. In this section, we will discuss two popular strategies: Value Investing and Growth Investing.

Value Investing

Value investing is a strategy that focuses on identifying undervalued stocks or assets in the market. These investments typically have lower valuations, which are reflected in their price-to-earnings ratios or book values. The central idea behind value investing is that the market may sometimes undervalue a company or asset, presenting an opportunity for investors willing to do thorough research and analysis.

The process of value investing involves:

• Fundamental analysis : Evaluating a company's financial health, management, and competitive advantages
• Value metrics : Identifying various valuation metrics, such as price-to-earnings, price-to-book, and dividend yield
• Margin of safety : Discovering investment opportunities with a built-in cushion to reduce the risk of loss

Famous investors, such as Warren Buffett and Benjamin Graham, have implemented value investing strategies to achieve long-term success.

Growth Investing

On the other hand, growth investing centers on companies that are expected to grow at an above-average rate compared to their industry. Growth investors seek opportunities in businesses they believe will offer substantial capital appreciation through rapid expansion or market-share gains. They prioritize the potential for future profit over the stock's valuation.

Features of growth investing include:

• High expectations : Companies targeted by growth investors typically have a history of robust revenue and profit growth
• Momentum : Investors seek stocks with upward price momentum, as increasing demand for these stocks may drive prices even higher
• Risk tolerance : Growth stocks can be volatile, and investors must be prepared to weather price swings

Renowned growth investors like Peter Lynch and Phil Fisher have demonstrated the effectiveness of growth investing throughout their careers.

Both value and growth investing strategies have their unique advantages and require different levels of risk tolerance. Investors should carefully consider their investment thesis and select a strategy that aligns with their objectives and risk appetite.

Venture Capital and Private Equity Investment Theses

When considering investments in private companies, venture capital (VC) and private equity (PE) firms each have their own unique strategies encapsulated within their respective investment theses. These theses provide guidance on the focus of investments, the sectors or geographies of interest, and the stage of the target companies.

Learn more about the differences between private equity and venture capital .

Venture Capital Investment Thesis

A venture capital investment thesis outlines how a VC fund aims to make money for its investors, typically referred to as Limited Partners (LPs). This strategy identifies crucial factors such as the stage of companies the fund will invest in, commonly early-stage companies, the targeted geography, and specific sectors of focus.

The thesis may vary depending on a venture capitalist's unique specialization, with some firms concentrating on a specific vertical and stage, while others invest more broadly without a core thesis driving their decisions. The underlying objective of a VC investment thesis is to outline how the firm will achieve high returns on investment by supporting and nurturing the growth of portfolio companies.

Private Equity Investment Thesis

In contrast, a private equity investment thesis is an evidence-based case in support of a particular investment opportunity. It usually begins with a concise argument illustrating how the potential deal supports the fund's general investment strategy. The thesis then provides details that substantiate this preliminary conclusion.

Private equity firms often target more established companies compared to venture capital firms, focusing on businesses with a proven track record. The PE investment thesis may identify areas where operational improvements, strategic mergers, or better capital structures could enhance value, ultimately generating a good return for the firm and its investors.

Overall, both venture capital and private equity investment theses serve as critical frameworks guiding investment decisions. They not only help align these decisions with a firm's specialized strategy but also provide a basis for evaluating potential deals to ensure they contribute to the firm's goals and long-term value creation.

Key Parameters for Evaluating an Investment

When assessing the viability of an investment, it is essential to examine various key parameters to make informed decisions. By analyzing these factors, investors can gain a deeper understanding of a company's financial health and its potential for growth.

One vital metric to consider is earnings per share (EPS) , which represents the portion of a company's profit attributed to each outstanding share of its common stock. A higher EPS indicates higher earnings and suggests that the company may be a lucrative investment opportunity.

Another fundamental metric is the return on assets (ROA) , which measures the effectiveness of a company in using its assets to generate profit. The higher the ROA, the better the company is at utilizing its assets to generate earnings. Similarly, return on equity (ROE) is a measure of financial performance that calculates the proportion of net income generated by a company's equity. A higher ROE demonstrates the efficient usage of shareholders' investments.

Conducting a thorough analysis of the company's financial statements is crucial. This includes reviewing income statements, balance sheets, and cash flow statements. By doing so, investors can gain insights into the company's profitability, liquidity, and solvency.

Another important factor to consider is a company's cash position. Adequate cash reserves enable a company to meet its short-term obligations and invest in growth opportunities. On the other hand, a lack of cash can leave a company vulnerable to market fluctuations and financial stress.

It is also essential to evaluate a company's capital structure, which refers to the proportion of debt and equity financing it uses to fund its operations. A balanced capital structure ensures financial stability, while excessive debt may lead to financial distress.

Examining a company's debt level is crucial, as it can directly impact the company's financial flexibility and risk profile. A high level of debt can hinder a company's ability to grow and adapt to changes in the market, making it a less attractive investment option.

Assessing a company's assets and how they're managed plays a significant role in evaluating an investment opportunity. This includes tangible assets, such as property and equipment, and intangible assets, such as patents and trademarks. Effective asset management contributes to a company's ability to generate profit.

Finally, it is important to scrutinize a company's costs associated with its operations, such as production costs and overhead expenses. A company that efficiently manages its costs will likely generate higher profitability and provide better returns for investors.

Creating Value through Strategic Planning

Strategic planning plays a crucial role in creating value for investors and businesses. It serves as the foundation for effective decision-making and guides companies towards achieving their goals. Through strategic planning, management teams can identify and focus on core competencies that contribute to a company's competitive advantage.

One way to create value is to prioritize revenue growth. By identifying key growth drivers, such as product innovation or market expansion, companies can allocate resources accordingly to boost earnings. Such targeted investments in growth engines allow firms to capture a larger market share and drive long-term profitability.

Another aspect of strategic planning involves optimizing a company's holdings. By assessing the existing portfolio, management can decide whether to divest underperforming assets or make strategic acquisitions that align with their investment thesis. The right combinations and adjustments can significantly enhance a company's overall performance and shareholder value.

Risk management is also an essential aspect of strategic planning. Companies must assess potential risks and incorporate suitable mitigation measures in their plans. This ensures that organizations are prepared for unforeseen circumstances, which can safeguard profits and protect the company's assets.

Furthermore, creating value requires continuous improvement and adaptation to market trends. Companies should routinely reevaluate their strategies to identify both internal and external factors that may impact their current position. By setting clearly defined objectives and quantifiable financial targets, management teams can measure their progress effectively and adjust their strategic plans as needed.

In summary , creating value through strategic planning involves a combination of focusing on core competencies, prioritizing revenue growth, optimizing holdings, managing risk, and continuously reassessing the company's strategic direction. This holistic approach can help businesses enhance their profitability, strengthen their market position, and ultimately deliver strong value creation to investors.

Understanding the Market and Competition

Before developing an investment thesis, it is crucial to have a deep understanding of the market and its competition. The stock market is influenced by various factors such as economic supercycles, bear markets, and secular trends. Analyzing these elements will provide a solid foundation to recognize potential investment opportunities.

An economic supercycle is a long-term pattern that occurs over several decades, during which the economy undergoes periods of growth and contraction. Investors need to be aware of the current phase and how it may impact their investment decisions. For instance, during a growth period, certain industries tend to outperform, while others may underperform during a contraction phase.

In addition to analyzing these market conditions, investors must also pay heed to the competitive landscape of the sector in which they plan to invest. Examining the competitors within the industry enables one to identify companies with competitive advantages, which may lead to superior performance. These advantages can stem from factors such as lower costs, innovation, or a dominant market share.

A bear market occurs when the stock market experiences a prolonged decline, typically characterized by a decrease of 20% or more from recent highs. In such environments, it becomes even more crucial for investors to understand the competitive dynamics within an industry to identify resilient companies that can withstand market downturns.

A secular trend is a long-term movement in a particular direction that can last for several years or even decades. Identifying secular trends within industries is essential to spotting opportunities for long-term growth. For example, investors may capitalize on sectors benefiting from a shift towards clean energy usage or the increasing importance of artificial intelligence.

In summary, understanding the market and competition requires a deep analysis of the stock market, economic supercycles, bear markets, and secular trends. By researching industry trends, evaluating market opportunities, and assessing the strengths and weaknesses of competitors, investors can develop a robust investment thesis that increases the likelihood of achieving long-term returns.

Industry Case Studies

In the investment world, the importance of an investment thesis cannot be overstated. By examining various industry case studies, we can gain insight into how businesses make strategic investments to enhance their value. In this section, we'll discuss notable examples from companies such as DuPont, General Motors, Rexam PLC, and Clear Channel Communications.

DuPont is a leading science and innovation company with a focus on agriculture, advanced materials, and industrial biosciences. During its acquisition of Dow Chemical, DuPont developed a robust investment thesis to justify the merger. Their investment case relied on the belief that the combined entity would benefit from increased operational efficiencies, new market opportunities, and enhanced innovation capabilities. This approach provided a strong rationale for the deal, which has created a more competitive company in the global market.

General Motors (GM) , a multinational automobile manufacturer, crafted its investment thesis in response to evolving trends in the automotive industry, such as the increasing importance of emissions reduction, electrification, and autonomous technology. GM's investment case centered on embracing these trends, focusing on innovation, and expanding its product offerings through strategic M&A, investments, and partnerships. For example, GM has made significant investments in electric vehicles and autonomous driving technology, positioning the company for future growth in these areas.

Next, we have Rexam PLC , a former British packaging manufacturer that was a leading producer of beverage cans globally. When Ball Corporation sought to acquire Rexam, they developed an investment thesis based on the value derived from combining the two companies' strengths. This thesis outlined the strategic fit between both companies, synergies from combining production capabilities, and projected growth, particularly in developing markets. The successful acquisition helped Ball Corporation consolidate its position as a global leader in the packaging industry.

Lastly, Clear Channel Communications is a media company specializing in outdoor advertising. As the company sought to expand its presence in this sector, it created an investment thesis centered around leveraging its core competence in outdoor advertising and acquiring strategic assets. One example is Clear Channel's acquisition of crucial billboard locations to solidify its competitive edge in the outdoor advertising market. This targeted growth strategy has allowed Clear Channel to remain a dominant player in the industry.

In conclusion, these industry case studies demonstrate the value of a well-crafted investment thesis. Effective investment theses provide a roadmap for companies to pursue strategic acquisitions and investments that create long-term value, while also helping investors evaluate the viability of proposed deals. By understanding how companies like DuPont, General Motors, Rexam PLC, and Clear Channel Communications have strategically invested in the market, we can better appreciate the importance of a well-structured investment thesis.

Long-Term Investment Strategies

A long-term investment strategy refers to an approach where investors hold onto their investments for an extended period, typically more than one year. This type of strategy aims to achieve the investment goal by allowing assets to grow through market fluctuations and capitalizing on the power of compounding interest. Diversification and patience play pivotal roles in ensuring the success of a long-term investment strategy.

Portfolio managers often use various techniques and methods to craft long-term investment portfolios. Some of these techniques include targeting undervalued sectors or stocks, dividend reinvestment plans, dollar-cost averaging, and asset allocation. By employing these strategies, portfolio managers increase chances of achieving their clients' investment goals over time.

In order to develop long-term investment strategies, investors should first define their investment goal . This could include objectives such as saving for retirement, funding a child's college education, or purchasing a home. Clear investment goals help in designing an appropriate investment strategy, taking into account factors like the investor's risk tolerance, time horizon, and available capital.

One key aspect of a successful long-term strategy is diversification . Diversifying across asset classes and industries allows investors to spread risks and potentially achieve higher risk-adjusted returns. A well-diversified portfolio will typically consist of a mix of stocks, bonds, and other asset types, with variations in investment size, industry sector, and geographical location. This diversified approach minimizes the impact of underperforming investments on the overall portfolio.

Another crucial element in long-term investing is patience . Market fluctuations can be tempting for investors to react to their emotions and make impulsive decisions, which could derail a well-thought-out investment strategy. Maintaining a disciplined approach and sticking to one's investment plan, even during periods of market volatility, is paramount to achieving long-term success.

In conclusion, long-term investment strategies require investors to define clear goals, diversify their portfolio, and exercise patience in the face of market fluctuations. By adhering to these principles, investors and portfolio managers can steer a course towards achieving their investment objectives.

Emerging Trends and Opportunities

In recent years, various emerging trends have presented attractive opportunities for investors. Among these trends, renewable energy, megatrends, and the coffee shop market stand out as sectors with significant potential for growth.

Renewable energy has gained considerable attention and investment as a response to the global push for addressing climate change and reducing emissions. Solar, wind, and hydroelectric power are some of the most prominent technologies in this sector. With an increased interest in clean energy from both governments and consumers, companies in this space are poised to experience substantial growth.

Megatrends such as urbanization, aging populations, and technological advancements are also influencing investment opportunities. These large-scale shifts provide a backdrop for businesses to tap into new markets and adjust their strategies to capitalize on these changes. For instance, companies working in healthcare and biotechnology may benefit from catering to the needs of an aging population, while businesses focused on artificial intelligence (AI) and automation may find increased demand due to technological advancements.

The coffee shop market, too, presents investment opportunities. This industry has experienced robust growth in recent years as consumers increasingly seek out unique, high-quality coffee experiences. Independent and specialty coffee shops are at the forefront of this trend. Niche coffee shops that offer novel and authentic experiences have seen success by catering to the specialized preferences of today's consumers. As the demand for artisanal and premium beverages continues to rise, businesses operating in this space can expect to have ample opportunities for growth.

In conclusion, current emerging trends such as renewable energy, megatrends, and the coffee shop market offer a wealth of investment opportunities. As these sectors continue to develop and evolve, investors with well-informed investment theses stand to benefit from the potential rewards in these growing industries.

Role of Financial Statements and Valuation Metrics

Financial statements play a vital role in the investment thesis by providing crucial information about a company's financial health and performance. They consist of the balance sheet, income statement, and cash flow statement, which offer insights into the company's assets, liabilities, revenues, expenses, and cash flows. Investors use these statements to assess the company's past performance, current financial condition, and potential for future growth.

Valuation metrics, on the other hand, are vital yardsticks that investors use to compare different investment opportunities and make informed decisions. These metrics include price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, price-to-book (P/B) ratio, dividend yield, and return on equity (ROE), among others. By analyzing these ratios, investors can gauge a company's value relative to its peers and make better investment choices.

Analysts and investors scrutinize financial statements to identify growth trends, profitability, and financial stability. For instance, they may calculate the gross margin, operating margin, and net profit margin to determine the company's profitability across different stages of its operations. Additionally, they examine liquidity ratios, such as the current ratio and quick ratio, to assess the company's ability to meet its short-term obligations.

Valuation metrics provide a quantitative basis for comparing investment opportunities within the same industry or across different sectors. For example, a lower P/E ratio may indicate that a stock is undervalued, while a high P/E ratio might suggest overvaluation. Moreover, the P/B ratio can help investors determine if a stock is undervalued by comparing its market price to its book value.

Another key valuation metric is the dividend yield, which measures the annual dividend income per share relative to the stock's price. A higher dividend yield may attract income-oriented investors, while a lower yield might be more appealing to growth-focused investors. Furthermore, the ROE ratio, which measures a company's profitability in relation to its equity base, is an essential metric for evaluating the efficiency of management in creating shareholder value.

In conclusion, financial statements and valuation metrics are indispensable tools for investors to evaluate a company's financial health and investment attractiveness. By analyzing these data points, investors can make well-informed investment decisions that align with their risk tolerance and investment objectives.

Concluding Thoughts on Crafting a Compelling Investment Thesis

Crafting a compelling investment thesis is crucial for informed investing decisions, as it helps investors thoroughly analyze a potential opportunity. A well-researched investment thesis demonstrates the investor's conviction level and reinforces their confidence in the investment choice. This process involves a deep understanding of the business, its value drivers, and its potential growth trajectories.

A strong investment thesis should be definitive, clearly articulating the reasoning behind the opportunity and the expected returns. This allows investors to stay focused on their goals and maintain their conviction, even when the stock's price movement does not align with their expectations.

By adopting a confident, knowledgeable, and neutral tone, investors can effectively communicate their investment thesis to others. Clarity in presenting the investment case is essential for persuading potential partners or stakeholders to support the opportunity. Utilizing formatting tools such as tables and bullet points can aid in conveying essential information efficiently and ensuring the investment thesis is easy to understand.

In summary, crafting a compelling investment thesis enables investors to make well-informed decisions that align with their financial goals. By developing a thorough understanding of the investment opportunity and maintaining a strong conviction level, investors can better navigate the market and achieve long-term success.

Frequently Asked Questions

How do you develop a strong investment thesis.

A strong investment thesis begins with thorough research on the company or asset in question. This may include looking at the financials, competitive position, management team, industry trends, and future prospects. It's essential to critically analyze the available information, identify potential risks and rewards, and establish a clear rationale for the investment based on this analysis. Staying focused on the long-term outlook and maintaining a disciplined approach to the investment process can also contribute to developing a robust investment thesis.

What are the key elements to include in an investment thesis?

An investment thesis should include the following key elements:

• Overview of the company or asset: Provide a brief background of the company or asset, including its market, size, and competitive positioning.
• Investment rationale: Detail the reasons for investing, such as attractive valuation, strong revenue growth, or a unique business model.
• Risk assessment: Identify potential risks and how they could impact the investment returns.
• Expected return: Estimate the potential financial return based on the identified growth drivers or catalysts.
• Time horizon: Indicate the investment period, typically long-term, during which the thesis is expected to play out.
• Fund size: Specify the amount of invested capital that will be allocated to this particular investment, considering its impact on portfolio construction, liquidity, and potential returns within the overall portfolio strategy

How can one evaluate the success of an investment thesis?

Evaluating the success of an investment thesis involves tracking the progress of the company or asset against its initial expectations and underlying assumptions. This may involve measuring financial performance, analyzing key developments in the industry and the company's position within it, and monitoring potential changes in overall market conditions. It is helpful to revisit the investment thesis regularly to assess its validity and make adjustments as necessary.

What's the difference between an investment thesis for startups and publicly traded companies?

An investment thesis for a startup often focuses on the growth potential of a new or emerging market, considering the innovative products or services the startup offers in that market. Here, the focus may be more on the potential for long-term value creation, the management team's ability to execute on their vision, and market fit.

For publicly traded companies, the investment thesis may include analysis of current financial performance, valuation multiples, and overall market trends. Publicly traded companies have more historical data and financial performance information available, allowing investors to make more informed decisions based on these factors.

How does an investment thesis guide decision-making in private equity?

In private equity, the investment thesis helps guide the selection of companies to invest in, as well as the structuring of deals to acquire those companies. It provides a blueprint for how the private equity firm aims to create value, including plans for operational improvements, financial engineering, or growth strategies. This thesis serves as a basis for monitoring the progress of an investment and helps make decisions on the timing of potential exits.

How can real estate investment theses differ from other sectors?

Real estate investment theses may focus on factors such as location, property type, market dynamics, and demographic trends to identify attractive investment opportunities. The analysis may also take into account macroeconomic factors, such as interest rates and economic growth, which can influence real estate markets. Additionally, real estate investments may be structured as either direct property investments or through financial instruments like Real Estate Investment Trusts (REITs), affecting the underlying investment thesis.

What considerations should a first-time fund manager have when developing a fund's investment thesis?

For a first-time fund manager, crafting a compelling and robust fund's investment thesis is paramount for attracting investors. Given their lack of a track record, these managers need to lean heavily on the research, clarity, and vision articulated in their investment thesis. The thesis should detail how the fund aims to identify ideal investments, especially those in industries with high margins. It should also benchmark the strategies against industry standards to highlight the manager's acumen and awareness of market norms.

How is a stock pitch related to an investment thesis and what role does a target price play in it?

A stock pitch is essentially a condensed, persuasive form of an investment thesis, often presented to stakeholders to advocate for investing in a particular publicly-traded company. A key element of any stock pitch is the target price, which is an estimation of what the stock is worth based on projections and valuation models. This target price serves as a quantitative anchor for the investment thesis, giving stakeholders a specific metric against which to measure potential returns and risks.

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Jun 24, 2020, vc lab: vc investment thesis template.

In order to build a strong venture capital firm as a first-time fund manager, you need to start with a strong Investment Thesis. Find our worksheet here.

What is the Investment Thesis for a venture capital firm?

An Investment Thesis is the strategy by which a venture capital fund makes money for the fund investors, called Limited Partners or LPs. It identifies the stage, geography and focus of investments, as well as the unique differentiation of the firm.

What are Limited Partners?

Limited Partners, or LPs, are investors in venture capital funds, and there are a number of common categories, including family offices, pension funds, endowments, sovereign wealth funds and even corporates. LPs often have allocations for different stages of venture capital as an asset class, and these allocations are provided by their internal or external investment strategy managers.

Why is the Investment Thesis important for a venture capital firm?

An Investment Thesis is used to attract Limited Partners, and it guides the activities of the firm. Most LPs have investment criteria for their venture capital allocations that they are looking to meet, and a compelling Thesis allows LPs to see if a fund meets their desired allocation criteria.

What are New Managers?

New Managers are a category of venture capitalists that are launching a new venture capital firm. Even experienced venture capitalists get categorized as a New Manager if they are launching a new firm. Many categories of LPs are restricted from investing into New Managers, including pension funds, endowments, sovereign wealth funds and even corporates. This is because New Managers do not have a track record and because the new firms run into common problems of any new business.

What is the most common Limited Partner for a New Manager?

Most New Managers raise capital from family offices, which are the investment operations of wealthy individuals and families. Small to mid-sized family offices are often led by a wealthy individual, such as an entrepreneur that has had a large exit, and these individuals make the decision to invest into a fund. Family offices often have an agenda and a focus that can align with a compelling Investment Thesis, allowing New Managers to more easily get meetings. 

How do you write a compelling Investment Thesis?

There are multiple components to a compelling Investment Thesis that we have compiled into a simple to follow format. A good Thesis can often take months to develop, iterating on feedback from the market, advisors, and fund investors. In order to start this process, we have created a simple template for creating a venture capital Investment Thesis below.

“[Fund Name] is launching a [$x MM] [Stage] venture fund in [Country / City] to back [Geography] [Sector / Market Companies] [with Secret Sauce]”

Below you can see tips for each component in [brackets]:

• [Fund Name] When getting started, we recommend using a last name or color, like ‘Ressi Ventures’ or ‘Orange Fund,’ since the Thesis will evolve many times over the first months. After you feel that you have a final Thesis, then choose a name that represents your fund.
• [$x MM] This is the size of committed capital by LPs to the fund. You will be able to raise a fund that is 10 times the size of what you think you can easily close from contacts that you already have. So, if you think that you can easily raise $500,000 from friends, acquaintances and other contacts, then your first fund size maximum is $5 MM.
• [Stage] Stage is usually based on fund size, and, for New Managers, the options are angel (<$5 MM), pre-seed ($5 MM to $15 MM), seed ($15 MM to $50 MM) and Series A (>$50 MM). It is easier to have a larger fund doing an earlier stage, such as a $100 MM angel fund, than it is to have a smaller amount of money for a later stage, such as a $10 MM Series A fund.
• [Country / City] This is the city or country where the New Managers are living or plan to live while running the fund. Now, most funds have a life of at least 10 years, so make sure to pick a city or country where you and your fellow New Managers plan to be for some time. In addition, if you are living in a large country, then it is better to specify a city or region. “East Coast” is better than the United States.
• [Geography] This is the region where the fund will invest in portfolio companies. If the Geography is not specified, then it is assumed that the funding will be local. This is particularly important for New Managers, who often try to be too broad and then do not appear credible. For example, it is unrealistic to assume that a New Manager with a small fund will do cross border deals that require complex legal management. 
• [Sector / Market Companies] This is the type of companies that the fund will focus on investing in, such as FinTech, digital health, SaaS or marketplaces. Ideally, when choosing a sector or market in a geography, the opportunity will be obvious to the right LPs, such as "East Coast Fintech companies” or “German SaaS companies.” 
• [with Secret Sauce] ’Secret Sauce’ is your insight into a sector or market opportunity based on your in-depth experience. For example, “West Coast heath startups based on my 15 years leading the largest health tech angel group in San Diego while practicing neurosurgery.” The secret sauce needs to show why you are uniquely qualified to create this fund, and, if the market opportunity is not obvious, it should also show why the market opportunity is important right now.

What is a sample Investment Thesis?

Using the above template, here are some clear and concise thesis examples:

• “Purple Ventures is launching a $5 MM angel fund in Brussels to back European government technology startups that leverage the partner’s experience in various political and bureaucratic leadership roles across the EU.”
• “Found Capital is a $15 MM Seed fund in Lagos to back African mobile payment and fintech companies sourced from the partners network built while working as startup ambassadors at Google, PayPal and Microsoft in Africa.”
• “Sven Fund is a $100 MM Series A fund in Singapore to back blockchain startups in Asia that are building dynamic supply chain systems, which is a market segment where the partner had the largest recent exit in the region.”

How specific should your Investment Thesis be?

A compelling Investment Thesis is very specific about stage, geography and focus to align with the allocation requirements of Limited Partners. A common problem is that New Managers are often afraid to be specific, since they feel it will limit their ability to do hot deals. A Thesis states the intention of a firm to pursue certain kinds of investments, but often is not legally binding in the firm or in the fund agreements. So, an Investment Thesis has the effect of gravity. Venture capitalists often can do deals that are far away from the Thesis, but they have less attraction.

How do you refine your Investment Thesis?

You will be refining your Thesis heavily for the first few months when forming your fund. The measure of a great thesis is how easily it can attract meetings with LPs, but the first person that you need to satisfy with your thesis is yourself.

Here is an initial exercise to get started that should take about 30 minutes to an hour.

• First, use the template above and try to write three versions of a potential venture fund thesis. As mentioned above, be as concise and specific as possible.
• Next, read each of them aloud while recording a video of yourself. Speak conversationally (in the same way you might casually pitch the idea to someone in an elevator), and in one video "take". 
• Then, watch the videos and ask yourself if you would realistically invest in that thesis. How clear was the message? How confident was the delivery? What questions come to mind?
• Finally, revise the thesis and video until you are satisfied with your work. Resist the urge to make the one-sentence thesis a one-page thesis. Remember: brevity is the key. 

Download this VC Investment Thesis Worksheet

What are the next steps.

This is just one part of the first steps to starting a venture capital firm, which include: 

• Review Our VC Investment Thesis Template
• Determining Your Venture Capital Fund Size
• Selecting a Venture Fund Area of Focus
• Building a Strong Value Proposition for a VC Firm

We will be adding separate guides for each of these sections shortly on our main How to Start a Venture Capital Firm Guide . 

This content is provided by VC Lab, the YC for VC. Learn more about the industry-leading and free programs at: https://GoVCLab.com If you have questions about venture capital, ask the leading AI for VC, Decile Base. The Decile Base venture AI offers a fund lawyer, accountant, and tax specialist on demand. https://DecileHub.com/base VC Lab is a part of Decile Group. Decile Group is unlocking the potential of venture capital with a full-stack platform that empowers emerging managers to launch top-performing funds 3x faster through training, tools, and capital. https://DecileGroup.com

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How to Develop a Strong Investment Thesis in Early Stage

Discover the eight steps to develop a strong investment thesis. Make informed, profitable decisions as a private investor with our guide.

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A well-crafted investment thesis can help investors clarify their goals and evaluate potential investments, ultimately leading to a successful performance of the fund.

What exactly is an investment thesis, and why is it so important?

An investment thesis is a concise statement that outlines an investor's belief about the potential returns and risks of a particular investment. It is a framework that helps investors make decisions about what to buy, sell, or hold in their portfolio, and it is based on a thorough analysis of a company's financials, market conditions, and competitive landscape.

A well-crafted investment thesis can serve as a valuable guide for investors to focus on their long-term goals and avoid making impulsive or reactive decisions based on short-term market fluctuations. By clearly defining their investment goals and criteria, investors can avoid being swayed by emotions or biases and instead make rational and thoughtful decisions.

How can private investors develop a strong investment thesis? 

Here are eight steps to follow:

1. Start by identifying the specific industry or market that you want to invest in. This should be based on your own interests, expertise, and goals as an investor.

2. Research the current state of the market , including trends, challenges, and opportunities. This will help you identify potential investment opportunities and develop a more informed investment thesis.

3. Evaluate the potential investment opportunities in the market, including the founding team, product, and business model of the startups. Look for startups that have strong potential for growth and differentiation in the market.

4. Develop a set of hypotheses or assumptions about the potential returns and risks of investing in early stage startups in the chosen market. This should be based on your research and analysis, and should include both the potential upsides and risks of the investment.

5. Test your hypotheses by gathering additional information and data, and by seeking the perspectives of other experienced investors. This may involve conducting interviews, attending industry conferences, or seeking out expert opinions.

6. Refine your thesis as needed based on the information and insights you gather. Be prepared to adjust your assumptions and expectations as new information becomes available.

7. Communicate your investment thesis clearly and concisely to others, including potential partners or investors. This should include a detailed explanation of your reasoning and a solid plan for realizing the potential returns of the investment.

8. Monitor the performance of the startups you invest in closely, and be prepared to adjust your thesis or exit the investment if it no longer aligns with your goals or if the underlying assumptions change.

Take the next steps with the bunch SPV or fund

Once you have developed your investment thesis, the bunch OS allows you to open standardized investment entities that are a) easy to understand, b) can be managed fully digitally and c) have significantly lower setup and management costs. We are on a mission to enable those who dare to take risks. Talk to us about how to get started with bunch .

We are excited to keep you posted throughout our journey to build the operating system for private market investors . While public markets have come a long way from the time when stock investments were made on costly phone calls, private markets are lagging behind. We want to take out the friction and free up time for fund managers, investors, and founders, allowing them to focus on the projects tackling the challenges of tomorrow. ‍ Subscribe to our newsletter here .

Disclaimer: The content presented herein is solely for informational and discussion purposes only. It is not intended to serve as legal, tax or financial advice or as an endorsement of any investment strategy. bunch does not provide legal, tax or financial advice. Readers should not base their investment decisions on the content presented herein or any other bunch-generated content alone and should seek appropriate professional advice. Nothing contained herein shall constitute or imply an offer to sell, purchase or enter into any transaction in respect of securities. The content contained herein is subject to change without notice. While we aim to present accurate and up-to-date information as part of bunch’s content, we undertake no obligation to update our content from time to time.

Johannes is leading strategic projects at bunch with a particular focus on the German market and the offerings around funds. Prior to joining bunch, he worked for one of Europe's largest and most active Venture Capital funds, building a portfolio of FinTech companies before switching to the operator side.

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What’s in an Equity Research Report?

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Even though you can easily find real equity research reports via the magical tool known as “Google,” we’ve continued to get questions on this topic.

Whenever I see the same question over and over again, you know what I do: I bash my head in repeatedly and contemplate jumping off a building…

…and then I write an article to answer the question.

To understand an equity research report, you must understand what goes into a  stock pitch first.

The idea is similar, but an ER report is a “watered-down” version of a stock pitch.

But banks have some very solid reasons for publishing equity research reports:

Why Do Equity Research Reports Matter?

You might remember from previous articles that equity research teams do not spend that much time writing these reports .

Most of their time is spent speaking with management teams and institutional investors and sharing their views on sectors and companies.

However, equity research reports are still important because:

• You do still spend some time doing the required modeling work (~15%) and writing the reports (~20%).
• You might have to write a research report as part of the interview process.

For example, if you apply to an equity research role or an equity research internship , especially in an off-cycle process, you might be asked to draft a short report on a company.

And then in roles outside of ER, you need to know how to interpret reports quickly and extract the key information.

Equity Research Reports: Myth vs. Reality

If you want to understand equity research reports, you have to understand first why banks publish them: to earn higher commissions from trading activity.

A bank wants to encourage institutional investors to buy more shares of the companies it covers.

Doing so generates more trading volume and higher commissions for the bank.

This is why you rarely, if ever, see “Sell” ratings, and why “Hold” ratings are far less common than “Buy” ratings.

Different Types of Equity Research Reports

One last point before getting into the tutorial: There are many different types of research reports.

“Initiating Coverage” reports tend to be long – 50-100 pages or more – and have tons of industry research and data.

“Sector Reports” on entire industries are also very long. And there are other types, which you can read about here .

In this tutorial, we’re focusing on the “Company Update” or “Company Note”-type reports, which are the most common ones.

The Full Tutorial, Video, and Sample Equity Research Reports

For our full walk-through of equity research reports, please see the video below:

Table of Contents:

• 1:43: Part 1: Stock Pitches vs. Equity Research Reports
• 6:00: Part 2: The 4 Main Differences in Research Reports
• 12:46: Part 3: Sample Reports and the Typical Sections
• 20:53: Recap and Summary

You can get the reports and documents referenced in the video here:

• Equity Research Report – Jazz Pharmaceuticals [JAZZ] – OUTPERFORM [BUY] Recommendation [PDF]
• Equity Research Report – Shawbrook [SHAW] – NEUTRAL [HOLD] Recommendation [PDF]
• Equity Research Reports vs. Stock Pitches – Slides [PDF]

If you want the text version instead, keep reading:

Watered-Down Stock Pitches

You should think of equity research reports as “watered-down stock pitches.”

If you’ve forgotten, a hedge fund or asset management stock pitch ( sample stock pitch here ) has the following components:

• Part 1: Recommendation
• Part 2: Company Background
• Part 3: Investment Thesis
• Part 4: Catalysts
• Part 5: Valuation
• Part 6: Investment Risks and How to Mitigate Them
• Part 7: The Worst-Case Scenario and How to Avoid It

In a stock pitch, you’ll spend most of your time and energy on the Catalysts, Valuation, and Investment Risks because you want to express a VERY different view of the company .

For example, the company’s stock price is $100, but you believe it’s worth only $50 because it’s about to report earnings 80% lower than expectations.

Therefore, you recommend shorting the stock. You also recommend purchasing call options at an exercise price of $125 to limit your losses to 25% if the stock moves in the opposite direction.

In an equity research report, you’ll still express a view of the company that’s different from the consensus, but your view won’t be dramatically different.

You’ll spend more time on the Company Background and Valuation sections, and far less time and space on the Catalysts and Risk Factors. And you won’t even write a Worst-Case Scenario section.

If a company seems overvalued by 50%, a research analyst would probably write a “Hold” recommendation, say that there’s “uncertainty around several customers,” and claim that the company’s current market value is appropriate.

Oh, and by the way, one risk factor is that the company might report lower-than-expected earnings.

The Four Main Differences in Equity Research Reports

The main differences are as follows:

1) There’s More Emphasis on Recent Results and Announcements

For example, how does a recent product announcement, clinical trial result, or earnings report impact the company?

You’ll almost always see recent news and updates on the first page of a research report:

These factors may play a role in hedge fund stock pitches as well, but more so in short recommendations since timing is more important there.

2) Far-Outside-the-Mainstream Views Are Less Common

One comical example of this trend is how all 15 equity research analysts covering Enron rated it a “buy” right before it collapsed :

Sell-side analysts are far less likely to point out that the emperor has no clothes than buy-side analysts.

3) Research Reports Give “Target Prices” Rather Than Target Price Ranges

For example, the company is trading at $50.00 right now, but we expect its price to increase to exactly $75.00 in the next twelve months.

This idea is completely ridiculous because valuation is always about the range of possible outcomes, not a specific outcome.

Despite horrendously low accuracy , this practice continues.

To be fair, many analysts do give target prices in different cases, which is an improvement:

4) The Investment Thesis, Catalysts, and Risk Factors Are “Looser”

These sections tend to be “afterthoughts” in most reports.

For example, the bank might give a few reasons why it expects the company’s share price to rise: the company will capture more market share than expected, it will be able to increase its product prices more rapidly than expected, and a competitor is about to go bankrupt.

However, the sell-side analyst will not tie these factors to specific share-price impacts as a buy-side analyst would.

Similarly, the report might mention catalysts and investment risks, but there won’t be a link to a specific valuation impact from each factor.

So the typical stock pitch logic (“We think there’s a 50% chance of gaining 80% and a 50% chance of losing 20%”) won’t be spelled out explicitly:

Your Sample Equity Research Reports

To illustrate these concepts, I’m sharing two equity research reports from our financial modeling courses :

The first one is from the valuation case study in our Advanced Financial Modeling course , and the second one is from the main case study in our Bank Modeling course .

These are comprehensive examples, backed by industry data and outside research, but if you want a shorter/simpler example you can recreate in a few hours, the Core Financial Modeling course has just that.

In each case, we started by creating traditional HF/AM stock pitches and valuations and then made our views weaker in the research reports.

The Typical Sections of an Equity Research Report

So let’s briefly go through the main sections of these reports, using the two examples above:

Page 1: Update, Rating, Price Target, and Recent Results

The first page of an “Update” report states the bank’s recommendation (Buy, Hold, or Sell, sometimes with slightly different terminology), and gives recent updates on the company.

For example, in both these reports we reference recent earnings results from the companies and expectations for the next fiscal year:

We also give a “target price,” explain where it comes from, and give our estimates for the company’s key financial metrics.

We mention catalysts in both reports, but we don’t link anything to a specific valuation impact.

One problem with providing a specific “target price” is that it must be based on specific multiples and specific assumptions in a DCF or DDM.

So with Jazz, we explain that the $170.00 target is based on 20.7x and 15.3x EV/EBITDA multiples for the comps, and a discount rate of 8.07% and Terminal FCF growth rate of 0.3% in the DCF.

Next: Operations and Financial Summary

Next, you’ll see a section with lots of graphs and charts detailing the company’s financial performance, market share, and important metrics and ratios.

For a pharmaceutical company like Jazz, you might see revenue by product, pricing and # of patients per product per year, and EBITDA margins.

For a commercial bank like Shawbrook, you might see loan growth, interest rates, interest income and net income, and regulatory capital figures such as the Common Equity Tier 1 (CET 1) and Tangible Common Equity (TCE) ratios:

This section of the report explains how the analyst or equity research associate forecast the company’s performance and came up with the numbers used in the valuation.

The valuation section is the one that’s most similar in a research report and a stock pitch.

In both fields, you explain how you arrived at the company’s implied value, which usually involves pasting in a DCF or DDM analysis and comparable companies and transactions.

The methodologies are the same, but the assumptions might differ substantially.

In research, you’re also more likely to point to specific multiples, such as the 75 th percentile EV/EBITDA multiple, and explain why they are the most meaningful ones.

For example, you might argue that since the company’s growth rates and margins exceed the medians of the set, it deserves to be valued at the 75 th percentile multiples rather than the median multiples:

Investment Thesis, Catalysts, and Risks

This section is short, and it is more of an afterthought than anything else.

We do give reasons for why these companies might be mis-priced, but the reasoning isn’t that detailed.

For example, in the Shawbrook report we state that the U.K. mortgage market might slow down and that regulatory changes might reduce the market size and the company’s market share:

Those are legitimate catalysts, but the report doesn’t explain their share-price impact in the same way that a stock pitch would.

Finally, banks present Investment Risks mostly so they can say, “Well, we warned you there were risks and that our recommendation might be wrong.”

By contrast, buy-side analysts present Investment Risks so they can say, “There is a legitimate chance we could lose 50% – let’s hedge against that risk with options or other investments so that our fund does not collapse .”

How These Reports Both Differ from the Corresponding Stock Pitches

The Jazz equity research report corresponds to a “Long” pitch that’s much stronger:

• We estimate its intrinsic value as $180 – $220 / share , up from $170 in the report.
• We estimate the per-share impact of each catalyst: price increases add 15% to the share price, more patients from marketing efforts add 10%, and later-than-expected generics competition adds 15%.
• We also estimate the per-share impact from the risk factors and conclude that in the worst case , the company’s share price might decline from $130 to $75-$80. But in all likelihood, even if we’re wrong, the company is simply valued appropriately at $130.
• And then we explain how to hedge against these risks with put options.

The same differences apply to the Shawbrook research report vs. the stock pitch, but the stock pitch there is a “Short” recommendation where we claim that the company is overvalued by 30-50%.

And that sums up the differences perfectly: A Short recommendation with 30-50% downside in a stock pitch turns into a “Hold” recommendation with roughly equal upside and downside in a sell-side research report.

I’ve been harsh on equity research here, but I don’t want to disparage it too much.

There are many positives: You do get more creativity than in IB, it might be better for hedge fund or asset management exits, and it’s more fun to follow companies than to grind through grunt work on deals.

But no matter how you slice it, most equity research reports are watered-down stock pitches.

So, make sure you understand the “strong stuff” first before you downgrade – even if your long-term goal is equity research.

You might be interested in:

• The Equity Research Analyst Career Path: The Best Escape from a Ph.D. Program, or a Pathway into the Abyss?
• Private Equity Regulation : 2023 Changes and Impact on Finance Careers
• Stock Pitch Guide: How to Pitch a Stock in Interviews and Win Offers

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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Read below or Add a comment

15 thoughts on “ What’s in an Equity Research Report? ”

Hi Brian, what softwares are available to publish Research Reports?

We use Word templates. Some large banks have specialized/custom programs, but not sure how common they are.

Is it possible if you can send me a template in word of an equity report? It will help the graduate stock management fund a lot at Umass Boston.

We only have PDF versions for these, but Word should be able to open any PDF reasonably well.

Do you also provide a pre constructed version of an ER in word?

We have editable examples of equity research reports in Word, but we generally only share PDF versions on this site.

Hey Brian Can you please help me with coverage initiated reports on oil companies. I could not find them on the net. I need to them to get equity research experience, after which only I will be able to get into the field. I searched but reports could not be found even for a price. Thanks

We have an example of an oil & gas stock pitch on this site… do a search…

https://mergersandinquisitions.com/oil-gas-stock-pitch/

Beyond that, sorry, we cannot look for reports and then share them with you or we’d be inundated with requests to do that every day.

No worries. Thanks!

Hi! Brian! Do u know how investment bankers design and layout an equity research? the software they use. like MS Word, Adobe Indesign or something…? And how to create and layout one? Thanks

where can I get free equity research report? I am a Chinese student and now study in Australia. Is the Morning Star a good resource for research report?

Get a TD Ameritrade to access free reports there for certain companies.

How do you view the ER industry since the trading commission has been down 50% since 2007. And there are new in coming regulation governing the ER reports have to explicitly priced and funds need to pay for the report explicity rather than as a service comes free with brokerage?

In addition the whole S&T environment is becoming highly automated.

People have been predicting the death of equity research for over a decade, but it’s still here. It may not be around in 100 years, but it will still be around in another 10 years, though it will be smaller and less relevant.

Yes, things are becoming more automated, but the actual job of an equity research analyst or associate hasn’t changed dramatically. A machine can’t speak with investors to assess their sentiment on a company – only humans can do that.

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How to Write an Investment Thesis in Private Equity

Get looped in.

Recent years have posed significant challenges for M&A activity, with private equity deal volume experiencing a stark 46% decline compared to the previous year in 2022. Similarly, venture capital deals globally saw a notable 42% decrease in the first 11 months. Moreover, the mounting dry powder, surpassing $1 trillion USD in the US alone, underscores the urgency for firms to adapt their business strategies to thrive in 2023 and beyond.

Amidst this landscape, transitioning to a direct sourcing model alongside intermediary deals is imperative. However, economic uncertainties compel firms to further refine their outbound strategies to capitalize on opportunities efficiently. Dealmakers face the crucial task of optimizing their time and focusing on strategic investments that align with their objectives. Crafting a compelling investment thesis becomes paramount, guiding direct deal sourcing efforts and enabling firms to differentiate themselves in a competitive market.

Read on to discover how a meticulously crafted investment thesis can drive success in direct deal sourcing strategies.

What Is an Investment Thesis in Private Equity?

An investment thesis is, quite literally, a thesis statement. It's succinct, yet comprehensive enough to serve as your firm's guiding principle to both source and secure ideal investments. 

Imagine you're back in school and writing a term paper. Remember how a thesis was treated as a single defining statement that guided the development of your entire paper? The same is true of an investment thesis for your private equity firm. Unlike your term paper, however, firms often have more than one thesis because they often focus on multiple types of deals at once. 

Dealmakers' theses can also be broken down into two specific types: top-down and bottom-up. A top-down investment thesis is something that helps your team understand and seek out ideal investment targets when sourcing.

Top-Down Investment Thesis for Venture Capital Example:

‍ "This $10MM seed fund focuses on US-based cannabis startups that are furthering the industry through technology and infrastructure research and development that can leverage our partners' vast experience in the logistics and supply chain sectors."

Once your firm has identified an ideal company that fits its top-down thesis, it's time to create a bottom-up version. Far more direct and specific in nature, a bottom-up investment thesis includes everything from particular information about the target company including financial statements and forecasting, future business plans, funding strategy reasoning, industry trends, etc. as well as why your firm is the best choice.

‍ Bottom-Up Investment Thesis for Private Equity Example:

‍ "Smith Partners is seeking to invest a $20MM Series A round in Asclepius, Inc. to aid in their rapid growth and contributions to the advancement of the healthcare industry. Their dedication to modernization combined with SP's vast network of cutting-edge automation manufacturers and forward-thinking healthcare providers make this partnership particularly exciting."

A bottom-up thesis would then continue into specifics about the company, detailing financial and employee records, proprietary knowledge or advantages such as patents, and more about what your firm brings to the transaction. A final bottom-up thesis can take many different forms: e.g., a comprehensive document, presentation, or video.

The key to both a top-down and bottom-up investment thesis is specificity. Every thesis your firm creates should be valid only for your firm . The combination of geographic location, sector or industry, company stage or type, fund size, reasons behind the investment or focus, and your firm's specific differentiators should make each of your theses unique.

Steps for Building an Investment Thesis Framework

Creating an investment thesis framework will help your firm draft theses more quickly and make sure all of the necessary information is included. Answering the following series of questions is a good place to start building a framework for both top-down and bottom-up theses:

• What is the goal of this thesis? This answer takes one of two forms: to find new target investment opportunities or to secure a potential deal. But before you can detail the rest of the thesis, you must know your end goal. ‍
• What are the basic parameters of your ideal deal? Once you have your overall goal, sort out the basics first: overall available capital, company demographics (e.g., location, size, industry), etc. ‍
• What are the influencing internal factors? What is your firm hoping to get from a deal that would fit this thesis? Do you need to bridge a valuation gap in your portfolio, for example? ‍
• What are the influencing external factors? If you've ever gone through a thematic sourcing exercise, this will feel similar. While your thesis should not be nearly as large in scope as a thematic investing strategy, socioeconomic or industry trends can be a driving factor for why your firm is looking at this type of investment and should be called out in your thesis. ‍
• Why your firm? While this is the simplest question, it's not only the most difficult to answer but also the most important. Your differentiator "what only your firm can offer to the industry or target company" and why you are particularly suited to this segment of the market (in a top-down thesis) or specific deal (in a bottom-up thesis) is the key to crafting a successful investment thesis in private equity. ‍
• Why this deal? For a bottom-up thesis, you must detail why this deal should be transacted: - Why this company? Is it the founder that instills confidence? Do they have intellectual property that makes the deal worthwhile? How are their financials impacting this decision? - Why now? - What does the future look like and what are your plans post-transaction? - What is the eventual exit strategy? When would you plan for that to happen? - How does this deal impact your portfolio?

The framework you build from answering these questions can then be refined into a single statement or document that serves as your thesis. But be prepared to make iterations. You must continually refine your theses as you gather more data, learn more about your ideal investment, and the world continues to evolve and change.

Putting Your Investment Thesis to Work

Once your firm establishes a thesis, it's time to leverage it effectively. Remember, a well-crafted thesis serves as a guide for qualifying opportunities and determining their potential value. Integrating your top-down criteria into a robust deal sourcing platform facilitates market mapping, identifies relevant conferences, enables direct sourcing, and offers comprehensive insights into target companies and their competitive landscape.

With over 190,000 sources and millions of data points, Sourcescrub's deal sourcing platform has consistently enhanced research productivity by 42.8% and expanded deal sourcing pipelines by 36%. Let's chat to explore how we can assist you in developing and executing your investment theses in any industry landscape.

Originally posted on “January 10, 2023”

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Investment Thesis Template

Create your own investment thesis slide with this free template

Prior to becoming a Founder for Curiocity, Hassan worked for Houlihan Lokey as an Investment Banking Analyst focusing on sellside and buyside  M&A , restructurings, financings and strategic advisory engagements across industry groups.

Hassan holds a  BS  from the University of Pennsylvania in Economics.

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The  Boston Consulting Group as  an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

This template allows you to create your own investment thesis slide detailing your overall strategy.

The template is plug-and-play , and you can enter your own text or numbers. The template also includes other slide pages for other elements of a financial model presentation.

According to the WSO Dictionary ,

"An investment thesis aims to take an abstract idea and turn it into a functional investment strategy. An investment thesis helps investors evaluate investment ideas, ideally guiding them in selecting the best ideas that can help meet their investment objectives."

A screenshot below gives you a sneak peek of the template.

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How to Create an Investment Thesis

by Admin | Feb 5, 2021 | Angel Investing , Finance , Venture Capital | 0 comments

One of the essential elements in a venture capital firm is the investment thesis. The thesis can come in many varieties, from broad and loosely defined focuses to a specific vertical and company stage. On the other hand, some investors choose to allocate capital without a core thesis driving their decisions and see success in this strategy. This post will define an investment thesis, why investors decide to develop one, and some tips on creating one.

What is an investment thesis?

Simply put, the investment thesis is an assumption made about a market, vertical, or trend that will drive the strategy for a particular firm or fund. Just as a startup will assume a problem or market need and build a product around solving that problem, an investor will consider various markets and trends and develop an investment strategy focused on that assumption.

Why develop an investment thesis?

The thesis is the driving force behind what a firm chooses to focus on to generate returns. It will be a fundamental part of how VCs decide what to look for in specific markets, source deals, and where they ultimately decide to invest their capital. The thesis helps keep a firm focused, allowing investors to work within particular parameters when they go about their business.

There are a couple of advantages to having a thesis-driven approach as a venture capital firm. It will drive relationships that the firm pursues. This relationship driver applies to how firms source deals from an investment standpoint and choose their limited partners. These relationships with experts in a particular vertical will help portfolio companies with mentorship, independent board seats, and talent sourcing.

A thesis compels VCs to be experts within their particular field. If a firm bases its thesis around FinTech, it will most likely have some expertise in that field. This knowledge will help them understand the marketplace, specific problems a startup is trying to solve and judge founder talent. The firm will also be a thought leader in the space by releasing analysis and reporting trends in the industry. Lastly, the firm’s partners will be a better value-add to the companies within their portfolio, paving a quicker path for a startup’s growth and success.

Example of a thesis

A16Z , a prominent Silicon Valley firm, has several different areas they invest in, from FinTech to Growth to Consumer focused startups. Below is their investment thesis for their FinTech portfolio:

“Fintech companies are innovating across broad categories — in banking, lending, insurance, real estate, and investing — both on the customer-facing side and in core infrastructure. We believe the combination of mobile, digital money, machine learning, and new data sources offers startups a unique opportunity to leapfrog outdated infrastructure and compete with incumbent financial institutions to reimagine the way we manage our finances.”   Source

We understand that the firm focuses on startups that use mobile and machine learning to innovate on financial management through this statement. This thesis has helped drive the firm’s investments in   Stripe   (now valued at $36B) and   Carta   (currently valued at $3.3B).

For an awesome hub of investment thesis examples, check out this   link !

How to build an investment thesis

When developing a thesis, there are vital things to keep in mind:

Markets : Start with market sizing to make sure that a particular industry is worth pursuing. We will discuss market sizing strategies in a future post.

Trends:   Understand macro trends impacting the markets and industries that you determine are big enough to pursue.

Companies : Break down each company within a market that has upside potential. Look at recent companies that have seen success within your specific industry focus.

Exits : Make sure there is an exciting exit environment for companies in that particular segment. You want your investments to see a return through going public or M&A activity.

Tips on the above:

Things to think about defining in a thesis would be company stage, geography, vertical, or market.

People tend to want a fully-formed thesis right off the bat, but it’s an iterative process. The scrum process might be three months, but the full process can take a year before talking about a thesis publicly.

Have a hunch on something that isn’t fully formed and then test it out:

Go out and talk to entrepreneurs.

Talk to buyers of the technology.

Form relationships with ecosystem partners.

Incrementally improve your thesis based on feedback and results.

For some more tips and strategies on creating a thesis, check out this informative   Medium post .

Final thoughts

The thesis can help you stay focused and is your north star. For startups, it will help them target your firm. For LPs, it will help them judge your conviction and investment strategy. When developing a thesis, think about taking on big problems and big ideas. There are so many significant issues to be solved globally, and we have a golden opportunity to help solve them. Think big, and don’t limit yourself only to ideas on making returns for investors, but how to impact the world.

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Equity Research Report

Step-by-Step Guide to Understanding an Equity Research Report

Learn Online Now

What is Equity Research Report?

Sell-side equity research analysts primarily communicate their investment thesis and perspective on the outlook of a publicly-traded company through the publication of equity research reports.

In the following guide, we’ll describe the typical components of a research report and illustrate the real-world application of these reports with regard to the buy side and sell side.

Table of Contents

What are the Different Types of Equity Research Reports?

Equity research report ratings (buy, sell, and hold), jp morgan equity research report example (pdf), how is an equity research report structured.

Equity research reports are usually available for a fee through financial data providers.

Barring a new company initiation or an unexpected event, equity research reports tend to immediately precede and follow a company’s quarterly earnings announcements.

That’s because quarterly earnings releases tend to be catalysts for stock price movements, as earnings announcements likely represent the first time in 3 months that a company provides a comprehensive financial update.

Of course, research reports are also released immediately upon a major announcement like an acquisition or a restructuring .

Additionally, if an equity research analyst initiates coverage on a new stock, he/she will likely publish a comprehensive initiation piece.

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Equity research reports are one of several types of key documents analysts have to gather before diving into a full-scale financial modeling project.

Why? The research reports contain estimates used widely by investment bankers to help drive the assumptions underpinning 3-statement models and other models commonly built on the sell side .

On the buy side , equity research is also widely used. Like investment bankers, buy-side analysts find the insights in sell-side equity research reports helpful. However, equity research is used to help the buy side professional understand the “street consensus,” which is important for determining the extent to which companies have an unrealized value that may justify an investment.

The three main types of ratings ascribed by equity research analysts are the following:

• “Buy” Rating → If an equity research analyst marks a stock as a “Buy”, the rating is a formal recommendation that upon analyzing the stock and the factors that drive price movements, the analyst has determined the stock is a worthwhile investment. The markets tend to interpret the rating as a “Strong Buy”, especially if the report’s findings resonate with investors.
• “Sell” Rating → In order to preserve their existing relationships with the management teams of publicly traded companies, equity analysts must strike the right balance between releasing objective analysis reports (and recommendations) and maintaining an open dialogue with the company’s management team. That said, a “Sell” rating is rather uncommon in occurrence because the market is aware of the relationship dynamics (and will interpret it as a “Strong Sell”). Otherwise, the analyst’s rating can be framed to not cause a steep decline in the market share price of the underlying company, while still releasing their findings to the public.
• “Hold” Rating → The third rating, a “Hold”, is fairly straightforward as it indicates that the analyst concluded that the projected performance of the company is in line with either its historical trajectory, industry comparable companies, or the market as a whole. In other words, there is a lack of a catalyst event that could cause a substantial swing — either up or down — in the share price. As a result, the recommendation is to continue to hold and see if any notable developments emerge, but regardless, continuing to hold the stock not too risky and minimal volatility in pricing should be anticipated in theory.

In addition, two other common ratings are “Underperform” and “Outperform”.

• “Underperform” Rating → The former, an “Underperform”, indicates the stock may lag behind the market, but the near-term slowdown does not necessarily mean that an investor should liquidate their positions, i.e. a moderate sell.
• “Outperform” Rating → The latter, an “Outperform”, is a recommendation to buy a stock because it appears likely to “beat the market.” However, the anticipated excess return above the market return is proportionally minor; hence, the “Buy” rating was not offered, i.e. a moderate buy.

Use the form below to download a research report from JP Morgan by the analyst covering Hulu.

Equity Research Report | JP Morgan Hulu (PDF)

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A full equity research report, as opposed to a short one-page “note”, usually includes the following sections:

• Investment Recommendation  ➝ The equity research analyst’s investment rating
• Key Takeaways  ➝ A one-page summary of what the analyst thinks is about to happen (ahead of an earnings release) or his/her interpretation of the key takeaways from what has just happened (immediately after the earnings release)
• Quarterly Update  ➝ Comprehensive detail about the preceding quarter (when a company has just reported earnings)
• Catalysts  ➝ Details about the company’s near-term (or long-term) catalysts that are developing are discussed here.
• Financial Exhibits ➝ Snapshots of the analyst’s earnings model and detailed forecasts
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I was looking for a template In word format, it would be very helpful. Nice webpage!

Thanks, but unfortunately we don’t have a Word template as these research reports have additional built-in functionality (charts, legal disclosures, etc).

was looking for an equity research report template

This article provides a report example, not a template. But we encourage you check out our financial statement modeling course!

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Align Technology: The Short-Sellers Are Wrong

• Align Technology reported its Q1 FY24 earnings and is due to report Q2 earnings on July 24th where revenue is expected to grow 4% YoY with non-GAAP operating margin slightly increasing sequentially.
• With Q1 revenue off to a stronger than expected start on shipments and higher ASPs across Clear Aligner and Systems and Services Segment, management raised their revenue guidance.
• However, Hedgeye has recently added Align to its short list with a possible 20% downside from weaker Q2, as well as lower forecast for H2 and beyond from macroeconomic pressures.
• I believe that the short sellers are wrong as the company may be at a turning point as inflation pressures subside, which could lead to an upside of 40% from its current levels, making it a “buy”.

RichLegg/E+ via Getty Images

Introduction & Investment Thesis

I initiated a "hold" rating on Align Technology ( NASDAQ: ALGN ) on March 1, where my thesis was predicated on my belief that the stock could remain under pressure as its operating margin had been declining, even though the company was showing signs of recovering revenue growth. Since then, the medical device company known for its Invisalign product has underperformed the S&P 500 ( SPY ) and Nasdaq 100 ( QQQ ) and is down 19% since the time of my writing.

The company is due to report its Q2 FY24 earnings on July 24, where revenue is expected to grow approximately 4% YoY to $1.04B while non-GAAP operating margin is projected to increase slightly on a sequential basis. In its Q1 FY24 earnings , management raised its revenue target to approximately 7% for the whole year after a stronger than expected start to the year across both its Clear Aligner and Systems and Services segments.

Since the earnings report, Hedgeye has added Align to its list of short recommendations with a projected downside of 20% as it expects management to report a weaker Q2 and lower growth forecast for H2 and FY25. They mostly cited macroeconomic factors as the main culprit. I believe their concerns are misguided.

I think we may be at a turnaround point for Align where revenue and profitability will likely accelerate as inflationary pressures subside. Plus, given my valuation assumptions, I believe that there is likely a 40% upside from its current levels, providing sufficient margin of safety to initiate a position in the stock. As a result, I will upgrade my rating from "hold" to "buy."

A preview of Align's Q1 earnings

Align reported its Q1 FY24 earnings, where it grew its revenue 5.8% YoY to $997.5. Out of the $997.5M, Clear Aligner segment contributed close to 82% of Total Revenue, growing 3.5% YoY, while the Imaging Systems and CAD/CAM Services revenue contributed the remaining 18% of Total Revenue, growing 17.5% YoY. I will break down some of the highlights of the business performance in each of these segments in the sections below.

Q1 FY24 Earnings Slides: Revenue growth across the quarters

Let's start with the Clear Aligner segment, where revenue growth was up across all regions, especially in the Asia-Pacific region, with total global shipments growing 2.1% sequentially as well as higher ASPs (Average Selling Price) for Invisalign used for comprehensive treatments. Specifically, strength in the teen market continues, with over 200,000 teens and younger patients starting treatment in Q1, which is up 5.8% YoY.

In terms of product innovation, the company launched the Palatal Expander system in the US and Canada, which is a 3D printed orthodontic device to address widening the upper arch in growing patients. During the earnings call , the management discussed that the initial response from doctors and patients using the Invisalign Palatal Expander system has been positive, as it is less painful than traditional expanders and facilitates better oral hygiene.

In order to drive awareness of the Palatal Expander System, the company invested in its marketing engine across channels such as TikTok, Instagram, YouTube, Snapchat, and more through influencers and creator-centric campaigns across regions, which I believe should boost the topline in the coming quarters.

Moving on to the second business segment, which is Systems and Services, the company saw revenue grow 17.5% YoY, driven primarily by non-Systems revenue from iTero Lumina wand upgrades in North America as well as higher Service revenue from larger volumes of scanners sold. During the quarter, the company also launched the iTero Lumina intraoral scanner, which will deliver faster scanning speeds, higher accuracy, better visualization, and a more comfortable scanning experience.

Shifting gears to profitability, the company generated $197.5M in non-GAAP operating income, which grew 13% YoY with a margin of 19.8%, an improvement of 130 basis points from the previous year. In my previous post, I wrote about my concern that the company was seeing its non-GAAP operating margin shrink, driven by weakness in demand as well as not being able to streamline its operating expenses. Although non-GAAP operating margin declined sequentially primarily due to increased investments in go-to-market teams, I am optimistic that the company was able to drive margin expansion on a year-over-year basis as it was able to better manage costs with non-GAAP operating expenses growing at a slower rate of 3.2% YoY. Simultaneously, the company is also benefiting from increased operating leverage from higher ASPs across Clear Aligner and its Services segment.

Q1 FY24 Earnings Slides: Trend of profitability across quarters

Looking forward, the management has raised its revenue guidance from its previous estimate of mid-single-digit growth to a range of 6-8% while keeping its non-GAAP operating margin estimate unchanged. I find this particularly optimistic, as this probably marks a trough, with acceleration ahead, especially when it comes to the strength in shipments for its Invisalign products and scanners, particularly in international markets, where it is well positioned among teen and young adult demographics, along with its robust product innovation.

Key updates since the last earnings call

On June 28th, Hedgeye added Align to its list of short recommendations, forecasting a downside of 20%. Tom Tobin of Hedgeye believes that it will come shy of its revenue estimates, as he expects continued softness in North America's GP utilization rate. Given that the management has already raised its revenue guidance for FY24, a weaker Q2 result might result in aggressive selling. Plus, Tobin expected that the management would give a softer outlook for H2, with lower estimates for FY25, as real income growth continues to slow while treatment financing costs and dental labor costs continue to rise.

While Tobin has correctly identified the plateauing of the utilization rate of Clear Aligner, I believe that we may see a reversal of that as demand slowly picks up from improving macroeconomic conditions. From late 2021 until now, the company has seen demand weaken as the US economy grappled with inflation, thus putting strains on consumer spending. We are finally starting to see clear evidence of disinflation after the latest CPI print after one of the longest stretches of tight monetary policy. With the Fed now likely to cut rates earlier than expected , I believe that it will reignite growth back in the economy, which will be conducive to consumer spending and hence boost Align's top line. Plus, I also like that the company is focusing on international expansion, where it is seeing faster growth in international markets, specifically in Asia Pacific. As a result, I disagree with Hedgeye's short position, as I don't expect the management to guide for a weaker H2.

Things to look for in Align's Q2 earnings call

1. Revenue guidance: The company is set to report its Q2 earnings on July 24 , where it expects revenue growth of approximately $1.04B, representing a growth rate of 4%. While beating its Q2 revenue guidance will be a positive sign, I believe it will be important to pay attention to the management's commentary and guidance on the following sub metrics within individual business segments.

• Clear Aligner Segment: While volume is expected to be up sequentially and ASP is projected to decline slightly from the previous quarter because of foreign exchange headwinds, I believe it will be important to look for management's direction on how it expects shipments to continue for the remainder of the year across regions. We have already seen that its teen market is growing steadily, so as long as it continues to onboard new teens and young adults at a steady pace, we should see shipments and ASPs trend higher for the remainder of the year, especially as more doctors and patients adopt its latest Palatal Expander System.
• Systems and Services: For Q2, the management expects Systems and Services revenue to be up sequentially as they ramp iTero Lumina. While Systems and Services contribute a smaller portion of the revenue, I believe investors should be paying attention to management's guidance on the number of scanners sold and the upgrade cycle affecting ASPs.

2. Profitability: Management expects the non-GAAP operating margin to be slightly above Q1 FY24, which would mean that it will likely be flat on a year-over-year basis. I believe that a higher than expected non-GAAP operating margin will boost investor confidence, especially as the company has suffered from shrinking margins over the last couple of years. I don't necessarily expect the management to cut back on its spending on Sales & Marketing and R&D; however, an expanding margin would be an indication that the company is finally unlocking operating leverage once again from higher ASPs in its business segments.

Is Align stock a buy?

Looking forward, assuming that Align meets its revenue expectation for FY24 at an approximately 7% growth rate, followed by an acceleration in the high single digit in FY25 and low teens in FY26, as it continues to drive its product innovation and go-to-market strategies to drive higher adoption of its products, especially in teen and young adult markets, while expanding internationally, it should generate close to $5.04B by FY26.

From a profitability standpoint, management has guided non-GAAP operating margins to be slightly above FY23 levels. Therefore, assuming that it can generate a non-GAAP operating margin of 22% in FY24, followed by a 100 basis point improvement every year after that until FY26, it should generate $1.2B in non-GAAP operating income with a margin of 24%. This is equivalent to a present value of $1B in non-GAAP operating income when discounted at 10%.

Taking the S&P 500 as a proxy , where its companies grow their earnings on average by 8% over a 10-year period, with a price-to-earnings ratio of 15-18, I believe Align should trade at 1.5 times the multiple, given the growth rate of its earnings during the period of time. This will translate to a PE ratio of 25.5, or a price target of $338, which represents an upside of approximately 40% from its current levels.

Author's Valuation Model

My final verdict and conclusion

I believe that Align may be at a turning point where revenue and profitability start to reaccelerate once again, especially after its Q1 earnings results, where we saw Clear Aligner shipments picking up sequentially, along with growing ASPs as it continues to expand internationally, drive a robust product innovation roadmap, and strength in its teen and young adults market. At the same time, the management is showing early signs of success with managing costs better, as non-GAAP operating margins expanded on a year-over-year basis.

While Tom Tobin of Hedgeye believes that the management will likely guide for a weaker H2 and FY25 as macroeconomic pressures intensify, I believe the opposite will occur. As inflation pressures ease, along with a growing probability of an earlier interest rate cut, I think we may be on the cusp of reigniting economic growth, which will bode well for consumer spending and act as a tailwind for Align's top line.

Plus, I believe that the stock is attractively priced at its current level, with a potential upside of at least 40% over a three-year horizon. Even if we take Hedgeye's 20% sell-off prediction as a maximum floor on the stock, the current risk-reward offers us a 20% margin of safety. Therefore, after assessing both the "good" and the "bad," I believe that the stock is a buy prior to its Q2 earnings.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Stock Split Fails to Sway Our Long-Term Thesis for Williams-Sonoma

Business Strategy and Outlook

Williams-Sonoma has carved out a modest position in what it estimates is a $750 billion global home category and an $80 billion US business-to-business industry. It has historically launched most of its brands organically in underserved segments, which has supported some brand awareness, facilitating top- and bottom-line growth. Its ability to drive business relies on customer loyalty and smart marketing and merchandising, and the firm has access to a lengthy history of customer analytics stemming from its catalog days. This should help Williams-Sonoma maintain its market share as it attempts to enter adjacent categories.

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Thesis Statement for Report

Report generator.

Crafting a strong thesis statement for a report is pivotal, ensuring your reader instantly grasps the core focus and purpose of your investigation. Unlike more argumentative contexts, reports often aim to inform or analyze rather than persuade. With the right approach, your thesis can effectively guide your audience through the facts and findings you’ve collated. Dive into these examples, comprehensive writing guide, and pro tips to make your report stand out and deliver its message succinctly.

What is a Report Thesis Statement? – Definition

A report concise thesis statement summary that presents the main point or central message of a report. It encapsulates the primary purpose, focus, or findings of the investigation, research, or analysis being reported. Unlike thesis statements for persuasive essays, a report thesis often aims to inform rather than argue a point of view. It serves as a roadmap for readers, providing them with a clear understanding of what the report covers.

What is a good thesis statement Example for a Report?

A good thesis statement for a report should be clear, specific, and give an overview of the main findings or focus of the report. Here’s an example related to a report on the effects of urbanization on local bird populations:

“After a year-long study, it was observed that urbanization in the Springfield region has led to a 30% decline in native bird populations, with habitat destruction, pollution, and increased human activity identified as the primary causative factors.”

In this example, the statement clearly presents the main findings of the report (the decline in bird populations due to urbanization) and highlights the significant factors contributing to this decline. It provides readers with a snapshot of what to expect in the report without diving into exhaustive details.

100 Thesis Statement Examples for Reports

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Report thesis statements concisely encapsulate the primary findings or objective of a report. Serving as the report’s cornerstone, these statements provide readers a snapshot of the content, focusing on the main conclusion or observation. Here are 100 examples tailored for a diverse range of topics:

• The analysis reveals a consistent rise in global temperatures over the past century, pointing to the effects of climate change.
• Surveyed employees express a 45% increase in job satisfaction after the implementation of remote working options.
• Studies on Lake Tahoe’s water quality show a decline in clarity, primarily due to urban runoff and pollutants.
• Historical data illustrates the shift from coal to renewable energy sources in the past two decades in Europe.
• A review of urban parks found they play a crucial role in enhancing city dwellers’ mental well-being.
• Investigation into ABC Corp.’s finances detected discrepancies, suggesting potential internal fraud.
• The declining bee population in North America correlates with increased pesticide use in agricultural regions.
• Research on ancient Egyptian mummies offers insights into medical practices and common diseases of the time.
• Analysis of 20th-century art movements demonstrates a shift from realism to more abstract forms post-WWII.
• The survey on teen screen time suggests a link between prolonged device usage and sleep disturbances.
• Data from Mars rover missions provides compelling evidence of water presence in the planet’s past.
• The audit of XYZ Company’s supply chain reveals dependencies that could pose risks in times of global disruptions.
• Archaeological digs in Greece point towards a previously unknown ancient civilization.
• A review of global literacy rates over the past 50 years indicates significant improvement, with few exceptions.
• The introduction of the electric car has reduced urban air pollution levels by approximately 25% in major cities.
• Research on brain plasticity suggests the adult brain can form new neural pathways post-injury.
• A comparative study of diets worldwide ties the Mediterranean diet to longer life spans.
• Analysis of data breaches in the last decade underscores the importance of multi-factor authentication.
• The examination of coral reefs in the Pacific reveals the damaging effects of sunscreen chemicals on marine life.
• A comprehensive study on global urbanization trends indicates a rapid increase in city populations in Asian countries.
• Data from 100 years of Olympic Games illustrates a consistent improvement in athletic performance metrics.
• Case studies on startups in Silicon Valley reveal that early adaptability is a key success factor.
• An analysis of major river systems shows significant plastic pollution, with microplastics being the primary concern.
• A review of ancient manuscripts from India offers new insights into early mathematical concepts.
• The study on children’s playgrounds in urban areas emphasizes the lack of inclusive designs for differently-abled children.
• Examination of fast-food consumption rates correlates with increased obesity cases in Western countries.
• The research on renewable energy adoption in African countries shows promising growth, especially in solar energy.
• Analysis of global shipping routes emphasizes the strategic importance of the Suez Canal.
• A deep dive into social media trends among seniors indicates a preference for platforms like Facebook over TikTok.
• Investigating e-commerce growth, the last decade recorded a 200% increase in online sales worldwide.
• Historical analysis of Antarctic ice layers provides a timeline of Earth’s atmospheric carbon dioxide levels.
• A study on digital education tools reveals a significant improvement in student engagement and comprehension.
• Research into traditional herbal remedies in South America has identified potential treatments for modern ailments.
• The assessment of forest cover in the Amazon basin suggests a rapid rate of deforestation in the last 20 years.
• Surveyed consumers express a growing interest in sustainable and ethically produced products.
• Analysis of public transportation systems in European cities points to the efficiency of tram networks.
• The study on global coffee consumption underscores its position as the most popular beverage.
• A review of cybersecurity measures in banking sectors worldwide shows a convergence towards biometric authentication.
• Data from wildlife conservation parks indicates a steady rise in the numbers of previously endangered species.
• A deep dive into AI trends predicts a transformative impact on the healthcare sector within the next decade.
• The study on traditional architectural practices in Japan offers insights into earthquake-resistant designs.
• Examining global fishing practices reveals the overexploitation of certain fish species.
• A comparative analysis of urban green spaces puts Central Park, New York, as a benchmark for biodiversity.
• Research on the impact of music therapy indicates significant benefits for Alzheimer’s patients.
• The study of volcanic activity patterns predicts potential eruptions in the Pacific Ring of Fire.
• Data analysis of online streaming trends shows a decline in traditional television viewership.
• The archaeological examination of the Roman Colosseum provides insights into ancient engineering marvels.
• A review of global nuclear energy trends indicates a shift towards fusion technology.
• A comprehensive study of global dietary habits links increased red meat consumption to health risks.
• Investigation into global internet connectivity shows the digital divide persisting in certain regions.
• Studies on urban air quality in India highlight Delhi as a hotspot for hazardous pollutants.
• The analysis of modern teaching methodologies underscores the importance of experiential learning.
• Research on global plastic recycling practices reveals only a 20% effective recycling rate.
• A study on marine life in the Great Barrier Reef indicates a decline in biodiversity due to bleaching events.
• Examination of global art sales shows a surge in digital art and NFT transactions.
• Data from drone surveillance in African savannahs aids in anti-poaching efforts.
• Investigation into the effects of urban noise pollution links it to increased stress levels.
• The study of ancient trade routes offers insights into early globalization.
• Analysis of global electric grid systems points towards a need for upgraded infrastructure.
• A review of global wine production trends shows a consistent quality improvement with new-age techniques.
• Research on bioluminescent organisms reveals potential applications in medical imaging.
• The study of DNA from ancient bones redefines the timeline of human migration.
• A comprehensive analysis of global freshwater reserves highlights the looming water crisis.
• Research into global digital payment trends predicts a decline in the use of physical currency.
• The assessment of earthquake-prone regions underscores the need for advanced warning systems.
• A study on sleep patterns worldwide reveals a growing trend of sleep deprivation in urban regions.
• The analysis of polar ice melting rates provides alarming data on rising sea levels.
• Research into quantum computing trends suggests a revolution in computational capacities in the coming decade.
• Examination of deep-sea ecosystems reveals unknown species and potential pharmaceutical applications.
• The study of global space missions underscores the international collaboration in exploring Mars.
• A comprehensive review of art therapy techniques highlights its effectiveness in trauma healing.
• Data analysis on global literacy programs shows the impact of digital learning platforms.
• Examination of ancient pottery offers insights into early human settlements and cultures.
• Analysis of migratory bird patterns links climate change to altered routes.
• Research on global food waste indicates that over 30% of produced food is discarded.
• A study on urban architectural designs showcases a trend towards green, sustainable buildings.
• The analysis of the global gaming industry predicts a rise in virtual reality experiences.
• Research on Antarctic wildlife reveals the resilience of species in extreme conditions.
• The study on self-driving car technologies indicates a significant reduction in road accidents.
• Comprehensive analysis of global internet speeds places South Korea at the top.
• Research into global investment trends highlights a rise in sustainable and green investments.
• The study of traditional farming practices offers insights into organic agriculture benefits.
• Analysis of global refugee patterns reveals a growing crisis due to geopolitical conflicts.
• Research on mindfulness practices indicates a decline in stress and anxiety levels.
• The study of global desertification trends underscores the impact of unsustainable farming.
• Examination of asteroid trajectories provides potential candidates for mining operations.
• Data analysis on global book sales indicates a revival of print books over e-books.
• Research into deep learning algorithms predicts a transformative impact on data analysis.
• The study of the human gut biome offers insights into dietary impacts on health.
• Comprehensive analysis of global sports trends showcases a rise in e-sports viewership.
• Examination of traditional culinary practices provides insights into cultural amalgamation.
• Research on global pollution levels indicates alarming levels in the Arctic.
• The study of DNA-editing technologies highlights ethical considerations and potential applications.
• Analysis of ancient rock paintings offers a glimpse into early human rituals and beliefs.
• Research on global urban planning trends underscores the importance of pedestrian-friendly designs.
• The study of Arctic flora and fauna provides data on species adaptation in cold climates.
• Comprehensive analysis of global volcanic activity patterns reveals potential geothermal energy sources.
• Research into global aging patterns indicates a need for revised elderly care systems.
• The study of oceanic currents offers insights into climate regulation and marine life migration.
• Examination of digital art tools indicates a democratization of artistic creation globally.

Thesis Statement Examples for Environment and Conservation Reports

• Examination of Arctic ice layers shows a 40% reduction over the past five decades.
• Studies on urban green spaces suggest they can reduce ambient temperatures by up to 5 degrees.
• Data on global tree planting initiatives show a significant offset in carbon emissions.
• Research on ocean acidification reveals its detrimental impact on shellfish populations.
• Analysis of urban waste management highlights the effectiveness of composting initiatives.

Thesis Statement Examples for Healthcare and Medicine Reports

• Data from clinical trials suggest Drug XYZ can reduce arthritis symptoms by 60%.
• Studies on telemedicine show its potential in reaching underserved communities.
• Analysis of mental health in teenagers links social media use to rising anxiety levels.
• Ongoing research on gene therapy offers potential cures for certain genetic disorders.
• A comparative study on global healthcare systems ranks Canada’s as the most efficient.

Thesis Statement Examples for Technology and Innovation Reports

• Data analysis on global smartphone usage reveals a 20% rise annually.
• Research on quantum computing suggests a breakthrough in the next decade.
• Analysis of AI trends indicates potential economic disruptions in traditional industries.
• Studies on virtual reality highlight its growing use in education and training.
• Recent advancements in battery technology promise to double electric car ranges.

Thesis Statement Examples for Economics and Business Reports

• An assessment of global markets post-pandemic predicts a shift towards e-commerce.
• Studies on sustainable business practices link them to higher customer loyalty.
• Examination of emerging economies places India at the forefront of growth.
• Data on consumer behavior shows a preference for local products amid global uncertainties.
• Research on gig economy trends indicates a rising freelancer workforce.

Thesis Statement Examples for Education Reports

• Studies on digital learning tools show improved retention rates among students.
• Analysis of global literacy programs points to their effectiveness in rural communities.
• Research on childhood education emphasizes the importance of play in cognitive development.
• Examination of university curricula worldwide suggests a move towards interdisciplinary studies.
• Data from student feedback highlights the need for mental health resources on campuses.

Thesis Statement Examples for Travel and Tourism Reports

• A comprehensive review of global tourism trends predicts a surge in eco-tourism.
• Analysis of airline industry data post-pandemic shows a shift towards regional travel.
• Research on popular global destinations places natural reserves at the top.
• Studies on sustainable travel indicate a growing demand for carbon offset options.
• Data on hotel industry trends shows a preference for boutique and personalized experiences.

Thesis Statement Examples for Arts and Culture Reports

• Examination of global music trends indicates a resurgence of vinyl records.
• Analysis of art markets worldwide shows a rise in digital art sales.
• Research on global film industries reveals a shift towards streaming platforms.
• A review of architectural trends worldwide underscores a blend of modern and traditional designs.
• Studies on literary trends highlight the rise of indie authors.

Thesis Statement Examples for Agriculture and Food Reports

• Data on global crop yields suggests a potential food crisis due to changing climates.
• Research on organic farming practices reveals their role in soil health and biodiversity.
• Analysis of global seafood consumption raises concerns over overfishing.
• Studies on GMO crops indicate potential benefits in pest resistance.
• Examination of global beverage trends points to a decline in soda consumption.

Thesis Statement Examples for Sports and Recreation Reports

• Data from the Olympics illustrates improved athletic performance metrics over decades.
• Analysis of e-sports trends indicates its growing popularity among younger demographics.
• Research on youth sports suggests a decline in participation due to increased academic pressures.
• Studies on global sports viewership rank football (soccer) as the most-watched.
• A review of recreational trends among seniors points to a rise in adventure tourism.

Do you need a thesis statement for a report?

Yes, you often do. While a report primarily conveys objective data, statistics, and results, a thesis statement offers clarity and direction. It succinctly defines the main focus or central argument, making the content more accessible and comprehensible. Especially in longer, more complex reports, a specific thesis statement can help streamline the information, guiding readers through the material and emphasizing the primary points or conclusions drawn from the data.

How do you write a thesis statement for a Report? – Step by Step Guide

• Understand the Purpose : Before anything else, understand the primary purpose of your report. Are you explaining findings from an experiment, analyzing data trends, or providing a broad overview of a topic?
• Gather Your Data : Review all the data, statistics, findings, or research that will be included in the report. This ensures your statement is rooted in factual evidence.
• Identify Key Findings : From your data, what are the most significant or striking findings? Highlight these as they might shape your thesis.
• Draft a Preliminary Statement : Using your key findings, draft a preliminary thesis statement. This doesn’t have to be perfect; it’s a starting point.
• Stay Specific and Concise : Your thesis statement should be one to two sentences, offering a clear overview without delving into specifics.
• Avoid Opinionated Language : Remember, reports are typically objective. Avoid using language that indicates personal beliefs or biases.
• Revise and Refine : Once you’ve drafted your statement, revisit it after you’ve written your report to ensure it still aligns. Make any necessary tweaks or refinements.
• Place Appropriately : For most reports, the thesis statement should appear early, usually in the introduction, so readers know what to expect.

Tips for Writing a Report Thesis Statement

• Stay Neutral : Reports are objective, so your thesis statement should reflect that. Avoid subjective or biased language.
• Back it Up : Every claim or assertion you make in your thesis statement should be supported by data or evidence in the report.
• Keep it Focused : Your thesis should narrow down the focus of your report to a specific topic or set of data points. Avoid being too broad.
• Use Clear Language : Your goal is to convey information, so prioritize clarity over complexity. Avoid jargon unless it’s industry-specific and necessary.
• Be Open to Change : As you delve deeper into writing your report, you might find that your original thesis statement no longer fits. Be willing to adapt and change it as needed.
• Seek Feedback : Sometimes, another set of eyes can offer a fresh perspective. Have colleagues or mentors review your thesis statement for clarity and relevance.
• Use it as a Guide : As you write, continually refer back to your thesis statement. It should serve as a guidepost, ensuring that your report remains focused and on track.

Text prompt

• Instructive
• Professional

Generate a report on the impact of technology in the classroom on student learning outcomes

Prepare a report analyzing the trends in student participation in sports and arts programs over the last five years at your school.