An aspiring banker walks into the interview room and is asked for a stock pitch.
“Pitch us a stock.”
“I really like Google because they have a strong business moat in search, ample free cash flow generation and is well positioned to benefit from progress at Waymo (the autonomous driving division) and their Moonshot programs.”
Good enough? Not really – this shows that you prepared to some extent but the follow-up questions are the ones that really matter.
We love the stock pitch in investment banking interviews because it is a really lazy open ended question where we can selectively ask questions to support your thesis to see how much you really understand markets.
What Stock Should You Pick For Your Pitch?
We usually agree with this:
1. Something outside of the industry you are interviewing in (so not an energy stock if you are interviewing in natural resources) – although you will have to know an industry stock as well in case they ask for that specifically
2. A stock that is not “hot” – chances are more interviewees may have already discussed Tesla or Apple and your interviewer is more likely to have read about it in the news
That said, even if you pick an obscure stock, do not think that the stock pitch becomes much easier because the questions that come after are directional and broad-based in nature.
What is the Stock Price right now and what is the market capitalization? What is the enterprise value?
“GOOGL is $1,169 a share right now with a market cap of $825 billion and net cash of ~$97 billion for an enterprise value of ~700 billion”
Seems like common sense to know this, but a lot of interviewees get stuck here because they get carried away with the business idea and do not have the actual numbers for this. Without the market cap, you cannot really be informed on the valuation (or the scale of the company, which is an investment consideration).
This also gives a snapshot of their capital structure, which could be a catalyst for a rerating in terms of valuation later.
What are some multiples that are relevant to Google and what multiples are they trading at?
The best way to look at this is to get your hand on some equity research reports from some large brokers that cover the stock. Usually, equity research analysts will use the same valuation methodologies for a sector and they should line up closely with equity research from other banks.
So if the brokers mention that they value Google on a 2019E EV/EBITDA basis that is a good one to use. You will want to know the EV, the EBITDA and the growth rate.
Now where that gets tricky is when you are asked to support why you think the multiple is too low.
If you are pitching GOOGL and you mentioned the merits of the company and the multiples they are trading at, you have not actually said anything about why it is a compelling investment. Sure it is trading at 13X 2019E EBITDA, but what do you know that the market does not reflect right now? Could it be that you think that EBITDA is going to be higher than estimates – and why?
It could be that you expect a division to be profitable because of whatever that the EBITDA estimates are not factoring in right now.
Let’s be serious – students do not have time to do full blown stock research, so just look for a broker that is overweight (has a buy rating) on the stock in your school’s equity research library and regurgitate what their analyst says about certain catalysts not being reflected in the stock price.
What is that multiple compared to its peers? How do you justify that premium?
Let’s say GOOGL is trading at 13x 2019E EBITDA and its peers trade at 10x. You should explain that it has warranted a premium over time from constantly beating estimates and having a cash cow business.
What is GOOGL’s business mix?
“Search dominates with EBITDA of […] but other divisions include X, Y and Z.”
This shows that you actually know the company instead of having a prepared line for the stock pitch. Theoretically, you would go into their 10K/Annual Report and look at the business segmentation in the notes of the financial statements but again it is much easier to rely on equity research where they will already break it out and mention the upcoming growth catalysts for each division.
Checking Your Stock Pitch for Accuracy
There are plenty of other questions that bankers can throw out there to see if you really know the stock even if they know nothing about it themselves. They will just pull up the stock on Google Finance or Factset while interviewing you to check.
The worst one for this is “does this company pay a dividend?”
Other questions could include:
Who are their competitors?
What are some challenges that face the company in the next few months?
What could management do differently that would increase shareholder value?
Who is the CEO? Who is the CFO?
Have they recently undergone any transformative mergers and acquisitions? (easily addressed by reading through the news/press releases section for the last year in their website’s investor relations section)
What has happened to the stock price in the last 12 months? So it’s up 70% and you think this run isn’t over?