Pitching Stocks (MM)
How a multi-manager long/short analyst builds a pitch: what the price already assumes, your numbers against the street's on a flat multiple, two cases and a probability with a date on them, the hedge, the size, and whether you can get out.
A multi-manager platform (Millennium, Citadel, Point72, Balyasny and their like) is a collection of small teams, pods, each a portfolio manager and a few sector analysts running their own book of the firm's capital. The book is market-neutral and usually sector-neutral, with a hard loss limit: a pod that loses a few percent is cut back, and one that loses more is closed. The firm is paying for one thing, idiosyncratic return: money made from being right about companies, not about the market, the sector or a style.
That shapes what a pitch is. Not a company summary, and not a view on where the multiple should be. A pod pitch is a gap against consensus on the next few quarters' numbers, backed by work the street has not done; a target at today's multiple; an upside case, a downside case and your odds, with a catalyst that has a date; a hedge against the closest peer so the sector cancels; a size set by risk, not conviction; and a check that you can get out. The interviewer will ask for all of it in about two minutes, and then ask what kills it.
- Start from the price. What growth does the multiple already assume, and how does that compare with the street? The trade is the gap.
- Your numbers, the target. Your earnings on a flat multiple. Run it backwards to see whether the pitch needs the market's help.
- Risk/reward and the catalyst. Two cases, a probability, the odds the market is already pricing, and a date.
- Hedge it. Long the idea, short the peer, sized by beta. What is left is the view.
- Size it. A risk budget and a stop; the smaller wins.
- Check the exit. Days to exit, crowding, and how much of the stock is the factor you just hedged.
Long X against short Y, this many percent of the book, beta-neutral. What the street has, what I have, and the two drivers behind the difference. The catalyst and its quarter. The target on today's multiple, the downside case if I am wrong, my odds against the odds the price implies. The size, the stop, the days to exit. The strongest bear argument, and what would make me cut it.
| Target on a flat multiple: 4.60 × 20 | $92, up 15% |
| Downside case, a miss at 3.90 EPS on 19x | $74, down 7.5% |
| Skew: 12 ÷ 6 | 2 to 1 |
| Your odds 60%: expected value 0.6 × 92 + 0.4 × 74 | $84.80, 6% above the price |
| Hedge | Short the closest peer, sized by beta |
| Size | The smaller of the risk rule and the stop rule |
Every row is a chapter. The numbers are round; in the chapters they are live, and the check questions draw fresh ones.
A pitch, from the price to the size
Each step points to the chapter that practices it.
Chapters
Start from the price: what is already in it
11 minA pitch does not begin with the company. It begins with what the price already believes, because the trade is the gap between that and your number.
- Turn a P/E into the growth the price is assuming
- Put the market's growth next to the street's and say which side the gap is on
- Price a stock at the multiple its expected growth deserves
- Explain why a pod analyst pitches a gap, not a company
Your numbers, the target, and the flat-multiple test
12 minA pod pitch is a view on the earnings, not on the multiple. Grow the numbers your way, hold the multiple where it is, and see what return is left.
- Split a target return into earnings growth, multiple change and dividends
- Underwrite a pitch at a flat multiple
- Find the exit multiple a target return quietly requires
- Say why the PM asks for the flat-multiple case first
Risk/reward: two outcomes, a probability, and a date
12 minEvery pod pitch ends in the same three numbers: what you make if you are right, what you lose if you are wrong, and how likely each is. A takeover is the cleanest version, so that is the model.
- Price a position as an upside case, a downside case and a probability
- Back out the odds the market is already pricing from where the stock sits
- Say what your edge is in probability points, and what it is worth per share
- Turn a third outcome, the beat-and-raise case, into value
Hedge it: long the idea, short the sector
12 minA pod is paid for the part of the return the market did not cause. Pair the long against its closest peer, size the short by beta, and what is left is your view.
- Size a short so the pair is beta-neutral
- Split a pair's P&L into market and stock selection
- Back out the long's alpha from the P&L
- Show what a dollar-neutral hedge leaves in the book
Size it: a risk budget, a stop, and the smaller of the two
12 minConviction picks the idea; arithmetic picks the size. Volatility, correlation with the book and the distance to the point where you are wrong set the position, and the tighter rule wins.
- Size a position to a risk-contribution budget
- Size the same position to a stop-loss rule, and take the smaller
- Back out the correlation a risk system is assuming
- Say what would let the PM give the idea more room
Before you pitch it: what are you really long, and can you get out?
11 minTwo questions a pod PM asks before anything else: how much of this stock is the factor you just hedged, and how many days does it take to leave. Both change the size, not the thesis.
- Count the days it takes to exit a position at a set share of volume
- Find the largest position a days-to-exit limit allows
- Split a stock's variance into the factor and the part that is the company
- Explain why a crowded name deserves a smaller size even when the thesis is right