Quick note before we get started: I'm running a live, cohort-based course on how to write an investment memo. You'll get hands-on experience with a group of peers putting into practice the stuff in this article. The next cohort begins on Sept 27 2021, you can learn more here. Would love to have you join!
Have you ever opened a 10-k, read a few pages and still had no idea what the company did?
Financial analysis is hard enough. In order to select a good stock, you have to derive the valuation of your target company. Then you have to compare it to the current valuation and see if there is enough upside to invest.
But even before you get to valuation, you have to figure out what the heck the company does.
For some companies this is straightforward. Netflix pays writers, directors and other crew members to make movies and television shows, and consumers pay Netflix a monthly subscription to have access to these videos. Makes sense.
But with other companies, it’s not as straightforward. Understanding industries like payments, biotech, or semiconductors requires going up a steep learning curve. What is the product and how does it provide value for customers? Which step in the value chain has the largest profit pool? What are the major drivers for market growth?
I’ve spent thousands of hours researching dozens of companies from many different industries. Along the way, I’ve developed a research process. While I’m no expert, I’m hoping that this article -- which outlines my process -- will be valuable to other students of investing.
It’s broken into five sections:
Where to Research
What to Look For
Note Taking & Organization
Pulling it Together
Let’s get into it.
Before researching a company, you have to, well, have a company to research. But time is limited: how do you decide which company to study?
As much as I’d like to have a fancy screening method, most of my ideas come from scrolling through Twitter, listening to a podcast, or talking to a friend. (Tip: you can attract friends who find interesting investment ideas by posting your own on a blog / Twitter!)
Here are a few questions I keep in the back of my mind:
Is this surprising?
Does this contradict something I thought to be true?
What is making lots of money but is low status or boring?
What has achieved a high return but no one is talking about?
What narrative is undervalued or overvalued right now?
In order to track my ideas, I keep a list of companies in a Roam page. While you can do a lot more with Roam, my ideas page is very simple. For each company, I include 1) the date I found it, 2) a blurb about why it’s interesting + any connections that come to mind, and 3) a link to the source of the idea.
Once I have some time to work, I look at this list and select something that I still have energy for. Then, I begin my research.
Where to Research
One of the toughest parts about researching new companies is figuring out where to look. In this section, I’ll outline all of the sources I use in my research.
There are a lot of sources listed here. During my research I usually end up checking pretty much all of them! The quality of each source varies depending on the company so it’s important to focus on your own understanding of the business rather than any one particular source. That said, let’s get into it.
Company Website. The company website is the most obvious resource to understand the product, however for B2B companies this can actually be quite vague. Look for sections titled “Services”, “Products” or “Pricing” to get a better sense of what they sell.
Form S-1. If a company recently IPO’d, they would’ve been required to file a Form S-1 introducing investors to the business. These documents are great. Lots of times they have an extensive Business Overview section that (usually) breaks down the business in an easy-to-understand manner.
10-K and 10-Q. Every quarter, a company has to file documents with the SEC updating investors on their financial and business standing. I spend a lot more time with the annual report (10-K) because it has more contextual information. I mostly use quarterly reports (10-Q) to update numbers.
Investor Presentations. An investor presentation is usually made when a company makes a live presentation at a live conference (and then they publish it online for all investors). Since investor presentations are often in service of pitching the company to a new set of investors, these are an excellent tool to understand a company. Just make sure it’s recent!
Earnings Transcripts. This is the most underrated source of information. Earnings transcripts are the transcripts of a quarterly call between the management of a public company and the analysts covering that company. These analysts spend all of their time analyzing a sector and these calls are their opportunity to ask management questions about the business. Because the analysts have as much knowledge as the company, these discussions are very insightful. I usually read the last couple earnings transcripts for any company I analyze (and the last 10-12 transcripts if you really want to understand it).
Seeking Alpha. Seeking Alpha is the investment blog that I use the most. It’s not necessarily reliable for investment analysis, but it is reliable at getting a full understanding of stocks and to hear how other people are framing their pitches. I believe the analysis is $30 / month, but in my opinion it’s worth it.
Independent investment blogs. Blogs like Scuttleblurb and Mostly Borrowed Ideas consistently provide excellent business and finance analysis. The only downside is availability: since they are more in-depth, they take longer, which means these blogs don’t cover every company you might be interested in.
Industry / VC blogs. There is a lot of great industry information out there. A lot of times this is how I find data points: I look at industry analysis and often they will link the most relevant information.
Google. Google can help with finding independent research, but it can also help you understand the company and product. One of my favorite ways to use Google is to type “[company name] vs” and see what pops up. For example, I was doing research on Stamps.com recently. So I Googled “Stamps.com vs” and it came up with all of their direct competitors. Then, I can click through each one and read reviews on review sites from actual customers.
Reddit & Facebook Groups. For most consumer products, there are subreddits and Facebook Groups of people talking about the product, discussing pros and cons, etc. There are even some Facebook Groups dedicated to transacting used items (called “buy sell trade” groups). One example where I used Reddit was in my post about lululemon’s acquisition of Mirror. During my research I spent a lot of time on competitors’ Reddit’s like r/pelotoncycle and r/tonalgym to get a sense of what customers actually thought of the product.
Podcasts. Podcasts are a great way to find interesting nuggets that other people haven’t found. While there are some mainstay investing podcasts that I frequent like Invest Like the Best and Yet Another Value Podcast, I usually start my podcast research at ListenNotes. ListenNotes is a search engine for podcasts and it’s extremely helpful in finding niche interviews. Tips for ListenNotes: search for the company (of course) but also search for the names of the CEO, CMO, CTO, etc. A lot of these interviews provide great insights but aren’t as well known because they are on industry-specific podcasts. And while they might be talking more about their area of expertise (marketing, technology, etc.) they are often really helpful.
Industry experts. If you can get on the phone with an industry expert, they tend to be the highest-leverage form of research that you can do. They often have years of experience and are making decisions on the ground floor. There are a few ways to find these people. First is to look at people in your network: a lot of times if you have a genuine reason to talk to someone they are willing to spend a few minutes answering your questions. The other main way to talk to industry experts is through expert calls. These can be found on platforms like Tegus.
Alternative data. Alternative data is data that isn’t provided by the company, but helps investors make investment decisions. Examples of alternative data are geolocation (foot traffic for retailers), mobile app analytics (tracking app views / downloads) and credit card data. Some of the reputable sources that I use are Antenna, Nielsen, IRI, SimilarWeb, ahrefs, and AppAnnie. A more comprehensive list of alternative data providers can be found here but most of these are quite expensive since their customers are investors.
For every analysis, you’ll need to pull data to populate your financial model. Here are the tools I use to pull data.
Seeking Alpha. In addition to having a strong community of analysts writing about stocks, Seeking Alpha also has a great tool to download historical financials (both annual and quarterly). This is where I usually start.
PublicComps.com. Awesome resource to see multiples and other non-GAAP metrics for software companies. I just use the free dashboard but with the paid plan you have access to more companies, historical financials, and a downloadable CSV.
KoyFin. This tool is great for quickly comparing companies and multiples over time.
10-K’s and 10-Q’s. Sometimes you have to pull data by hand, and 10-K’s and 10-Q’s are the definitive primary source for company financial information.
In addition, there are resources like FactSet, CapitalIQ, S&P Global, Bloomberg and others that make it super easy to analyze companies with data sets and Excel plug-ins. Unfortunately, these are tens of thousands of dollars because their customers are professional investors.
What to Look For
Alright, so you have a bunch of places to look for information. But what should you actually look for?
This list is considerable, and not all of the questions will provide meaningful insight into the company’s performance. It’s a matter of explore vs exploit. When researching a company for the first time, you won’t know what matters. You’ll read reports, summarize information, and crunch numbers: this is the time to explore. It won’t be until later on that you realize the 3-5 factors that impact the future performance of the business. This is when you develop conviction on a company and make your investment decision: exploit.
Here are some questions I keep in the back of my head when researching companies.
Product / Business Model
What is the value proposition of the company? / What problem is the company solving?
What are the key drivers of the business?
Revenue = Price * Quantity. Are revenue changes driven primarily by increase in price or volume?
What is the revenue outlook going forward? Do you expect it to continue? What needs to
Is the revenue transaction based or recurring?
How has the product changed over time and what impact has that had on the revenue and profitability of the business?
Who are the competitors?
What is the composition of the competitive landscape? Monopoly, duopoly, fragmented, etc.
How is the value proposition different from competitors?
What do customers think about the product? Reviews, feedback, etc.
What is the NPS of the product and competitors’ products?
In what situation does the market win but the company loses?
What market does the company operate in? How do you estimate the size of it? Total airline revenue, TV households, number of SMBs, etc.
What are the major market headwinds? Tailwinds?
Is the company growing faster or slower than the market they operate in? Why?
What percent of the market share could the company realistically capture?
Does the market tend towards winner-take-all / winner-take-most or will it be fragmented?
Value Chain and Moat
Who are the suppliers? What is the composition of suppliers? Monopoly, duopoly, fragmented, etc.
Who are the customers? What is the composition of customers? Monopoly, duopoly, fragmented, etc.
What is the moat of the business and how sustainable is it? Some examples include Regulation, Scale, Network effect, Brand, Data and Tech / IP.
What signs in the past show that the business has a moat? Price increase, few new entrants, etc.
What are the unit economics of the business?
Which costs are fixed? Variable? Does the company experience significant operating leverage?
How large does the business have to be in order to clear the breakeven point and become profitable?
Does the company have a history of strong free cash flow? If not, is there a reasonable plan to get there?
How has the profit margin evolved in recent years? What were the underlying drivers?
What are the one-off costs / add-backs over the past few years? Is there good evidence to show that these are actually non-recurring?
What are the growth opportunities for the company?
Can the company upsell existing customers? Is there proof in the past that they’ve done this?
Can the company continue to acquire new customers? Can they do so at the same cost (or lower) as they currently do?
Are there inorganic (M&A) growth opportunities? Does the company have a track record of successful acquisitions / integrations?
Who are the competitors? Some criteria include Industry & Product, Size, Growth Rate, Profitability and Cap Structure.
Which multiples are most relevant?
What has to be true for the company to maintain the same multiple?
What has to be true for the company to achieve multiple expansion?
Is there another company that's undervalued?
Capital Allocation / Financing
Will the business need additional cash financing going forward? Has management specified if it will be debt or equity?
What does the company do with the capital they generate? Options:
Keep cash on balance sheet
Invest into internal projects
Purchase / invest in other companies
Pay down debt
Return capital to shareholders via buybacks or dividends
Are there any major risks related to regulation changes?
Is management exceptional? Incompetenet? Why?
Note Taking & Organization
As I’m researching a company, I keep a document in Roam with all of my research. Here’s an example for my research on Wish:
I break it into a few sections:
I keep two things in this section.
The first is articles or links that I want to read later. This is much more effective than having dozens of tabs open in my browser. Additionally, because my research spans days or weeks, it allows me to pause where I am and keep going later.
The other thing I keep in here is open questions to research. These are things that I think might be interesting, but I need to dig into more or independently verify. Sometimes I come to realize that these questions aren’t relevant, but it’s good to list them out in case they are.
In this section, I write notes that act as building blocks. Each one is a summary of a concept or idea that might be useful to the final thesis. Writing it out not only helps with organization, but it also helps me solidify my thinking by putting it into my own words. A kind of mini “the best way to learn is to teach”, if you will.
These drafting notes are very similar to what Tiago Forte calls Intermediate Packets: ways to make progress on a research project in gradual steps.
At some point 3-5 themes will emerge from these drafting notes. These themes tell the story of the investment and become the pillars of the thesis. Sometimes I’ll organize the themes in Roam, or if I’m writing a public analysis, I’ll move over to Google Docs to structure the thesis.
Research Notes & Stats
The last two sections have the same purpose: to organize source material.
The Research Notes section is for notes that are direct quotes from primary sources or articles. This is usually filled with quotes from earnings transcripts, 10-K’s or industry reports.
The Stats section is to jot down important statistics about the company. Most of the time my brain will remember the important metrics without listing them in this section. However, it’s still valuable to write them down (especially with more complicated businesses) and makes it easier to pull together information for the thesis.
For both of these sections, I include the source of the information in the note below.
Pulling It Together
After all of this research and analysis, it’s time to pull together a thesis.
Good investment memos can be summed up in an elevator pitch that’s no more than a couple of sentences. However, don’t be fooled. This does not mean that these pitches are simple or hastily prepared. Instead, compressing an investment idea into a few sentences is a sign of deep thinking.
The elevator pitch stands on the shoulders of 3-7 themes that support the thesis. And these themes are supported by the hours of research and analysis done in order to develop conviction on the company.
To make this more clear, let’s use Chamath Palihapitiya as an example. Last year he took Opendoor public through a SPAC. In the process, he published his investment memo (found here).
You’ll notice it’s only 1 page long. The summary is only a few bullet points. There is clearly a lot of thought behind the investment; you can find the 49-page investor presentation here. And yet, the thesis can be described in a few sentences.
One way to check if you’ve thought deeply enough about a business is to argue for the other side. Charlie Munger once said: “I never allow myself to hold an opinion on anything that I don't know the other side's argument better than they do”. If you earnestly address every argument from the opposing view and you still believe in your thesis, it’s time to place your bet.
This fall I’m teaching a course on how to write an investment memo. I’m extremely excited about it. If you’re not already a part of my email list, I’d encourage you to sign up below to get early discounts on the course.
Enjoy reading this?
Join my newsletter! Each week I breakdown interesting finance and investing topics. I put in hours of research so that you can spend minutes learning. Unsubscribe at any time.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.