Brett Caughran

Brett Caughran



RESEARCH MODULE: QUICK DIVE I started at Maverick in '08 and when I say I was green, I was GREEN. I had no idea what I was doing. I started in investment banking in July '07, right at the tail end of the LBO boom and right at the beginning

of the credit crunch. Virtually every LBO the firm was working on died immediately. I was assigned to be the junior bitch on the Delta-Northwest deal and all I did for 8 months was update comps and report the airline news to Bob Greenhill each morning (which was fun, actually).

But I didn't do any modeling. So when I started at Maverick a year later in August of '08, I really didn't have the tools to do the job. Virtually no modeling skills, and certainly no stock research skills. While Maverick's 1-week training program was rigorous by many standards

(a week more than was given to juniors at the other 3 large hedge funds where I worked), it did not equip me to do the job. I joined Maverick's consumer team, and was assigned to help a senior analyst in the US and Europe, splitting my time.

My first project was to look at Tui Travel, a European packaged tours operator. My instructions were as follows - "Hey Brett, take a look at Tui Travel and let me know what you think". Ummm. Ok. I was terrified to ask what "take a look" means,

how to determine what I actually thought, and how to "let him know" what I thought. I had no clue. Also, he didn't give me a specific turnaround time. I WAS LOST. I spun my wheels for 3-4 days, too stupid to ask for direction, and ended up spouting some gibberish that I am

SURE was not helpful to the research process. The content I now put together 14 years later is all catered at that lost, 23 year old, who desperately wanted to do a good job but just didn't know how. So here is the DEEP DIVE ROADMAP: QUICK DIVE that I wish I had back then.

BASIC INFORMATION REVIEW (4 hours) First step is to wrap your hands around the information that's out there. I personally like to start with the 10-K. It's amazing to me how many mgmt meetings I've been in where analysts ask the CEO about information that is clearly disclosed

in the 10-K. I'm not talking about reading all 283 pages. I have a module called "how to read a 10-K in 60 minutes". Look for information on 1) products & segments, 2) color on operating performance (MD&A), 3) how the company reports key segments / products, 4) any risk factors

that are non-boilerplate. So you're skipping through the footnotes on operating leases. You can come back to that - don't get bogged down in your first cut. You are trying to understand, 1) what the business does 2) how it makes money, 3) some color on recent business trends.

I like to create a running notes file while I do this (I call this my PLATE file). The 10-K is the most unbiased introductory source for that information (the SEC generally doesn't like overly promotional commentary in the 10-K). After that, I will read 1-2 good sell-side

initiation reports, focusing more on the business & industry content than the stock content. I will read the most recent earnings call transcript, the most recent investor conference transcript, skim the most recent investor deck, and skim the last investor day deck (if

applicable). So I've basically just been reading for 4 hours, and now I have a basic, high level overview of the situation. BASIC MODEL & LOOK-BACK ANALYSIS (2 hours) At this point, I will build a very basic 10-year annual model (which can be the backbone for my deeper model).

This allows me to study the history of the business and put what I've read into financial context. I'm looking at historical patterns - revenue growth, cash flow, operating margin trajectory. What has been the avg organic growth rate and how cyclical has that growth been?

What has been the margin trajectory and incremental margins? How cyclical have margins been? Are we at a peak or a trough? What about FCF generation, and growth & predictability of FCF? This will give me an initial sense of what kind of business I'm dealing with.

KEY DRIVER IDENTIFICATION (2 hours) Virtually all experienced (good) buy-side investors agree that there are generally 2-3 key issues that matter in determining the forward direction of a stock. Find these now. You understand the basics, now think critically and analyze

what the 3 key drivers (KDs) are here. Look at the key business segments & products as a % of revenue & EBIT. Compare relative growth trajectories of these products & segments. Understand if there are any latent earnings drivers - a new product launch, trough margins in a key

segment - any drivers that could lead to a step change in forward EPS. This is often where I will read a little more sell-side research to see if I can identify the source of debate, the bull & bear cases. Or speak briefly with a trusted analyst or specialist sales to get a sense

of the key turning point on the stock. Develop a very clear view of what you think are the 3 KDs here. BASIC EARNINGS POWER (2 hours) Now, I will add forecasting infrastructure (see my modeling threads) into my 10-year model, building the architecture to emphasize the KDs

Hopefully I have developed a ballpark view of where revenue could be in 3-5 years based on historical study of the trends and a high level review of street commentary. I will check current margins vs. peers to see if there is an outsized margin opportunity. I will work to develop

a bull, bear and base case on EPS 5 years out, flexing my inputs on the KDs. I'm not working on developing an accurate forecast here, I'm just working on thinking through the parameters of what the business could potentially product, ultimately to circle back and assess asymmetry

and whether the stock merits additional work. BASIC STOCK ANALYSIS (2 hours) Here I'll do a bit of work on the stock (vs. the business). How has stock performed and why? Was there a recent big gap down? Go read that earnings call and a new notes and understand why. Check

historical beat/miss trajectory - has mgmt been on a beat & raise trajectory or miss & lower. Do a quick valuation analysis vs. peers on EV/Sales, EV/EBITDA, P/E and FCF yield, and also look at those valuation metrics for this company on an absolute & market-relative basis over

the last 15 years (building comp & valuation templates where you can just drop in tickers makes this an easy process). Is the stock at a peak, trough or median valuation? PREPARE INITIAL FINDINGS FOR PM (1 hour) At this point in the Quick Dive process, I like to implement a

GO OR NO GO decision on the stock. 12 hours of work is enough to get a basic sense of what the stock offers. What is the debate here, and can we generate a non-consensus view? What is the general asymmetry of the set-up? Is this a peak on peak or trough/trough situation? CONT'D

I'll generally just prepare a one-pager (or e-mail at this point). XYZ STOCK: INITIAL FINDINGS. GO OR NO GO? 1) Basic business summary 2) Summary of recent trends (biz & stock perf) 3) Overview of key drivers & what makes/breaks stock 4) Summary of debate & bull/bear case

5) Layer valuation into bull & bear case EPS and quantify initial R/R. 6) What we're playing for. If we come to correct conclusion on bull case, what is EPS power & w/ reasonable valuation assumption, how much upside is there? 7) General overview of next steps in a GO case.

You're most valuable asset as an analyst is your time. You don't want to be drilling dry well after dry well. Pushing a GO or NO GO decision on your PM will limit your dry wells. PM's have all sorts of historical biases (some unfairly) - maybe they have a pattern recognition of

hating these types of situations. No matter how much work you do here, PM will never buy the stock. You want to know this NOW, before you spin your wheels (and PM's, you don't want your analyst digging dry wells!). So agree on a quick GO or NO go at this point to make the process

more efficient for all. And ask the PM 1) Am I on the right research track here? 2) What is PM's view of right valuation framework here? 3) What would PM need to know to be comfortable putting this position on? 4) Does PM want to set up call w/ mgmt? Start scheduling this now

Don't do what I did on Tui Travel, accepting vague directions and no feedback. Ask your PM for feedback & direction (diplomatically). If PM agrees this is a promising idea, continue on with the DEEP DIVE, which I will discuss in future tweets. But the general next steps for

my DEEP DIVE ROADMAP are as follows. 1) Full model construction 2) Deep information review 3) Initial diligence on key drivers 4) Competitive assessment 5) Vetted Bull, Base & Bear cases 6) 30-year reverse DCF for price-embedded expectations

7) Full valuation assessment via multi-faceted approach 8) Identification of past relevant case studies 9) Catalyst path assessment 10) Sentiment & narrative assessment 11) Initial management meeting 12) Development of continuing diligence plan 13) Full pitch for PM & Team

Each of these points are really their own standalone tweet thread, so I will be circling back to each. But I do very much hope for the lost 23 year old out there reading this thread that just got asked to "take a look" at XYZ stock that this framework is helpful!

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