Investment papers are written for a variety of purposes, and should be comprehensive while drawing specific conclusions based on evidence presented in the paper. Your audience should be able to draw a straight line from the supporting information presented to the conclusions you provide, although investing decisions always have some subjectivity. Maximize the amount of the investment decision that is objective by including detail such as supporting exhibits and valuation models. Investment papers written for specific audiences may vary somewhat in the components you choose to include, or the depth of information included.
Company Description and History
First provide a description of the subject company, along with its history, management team background and operations. A company with a longer operating history is generally less risky. This approach echoes the standard format you might see in a Securities and Exchange Commission 10-K filing, which is likely the investment summary most widely used by domestic investors.
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A competitive analysis should include a deep analysis of the market in which the company operates, the overall industry and economic forces that can affect the company's financial performance. This demonstrates that you have performed a thorough analysis of the company's external business environment. Determine the subject industry's position in the business life cycle: startup, expansion, saturation or decline. If your subject company is genuinely innovative, it may be able to outperform in an industry in decline. Also, industries may be subject to shorter-term cycles, which typically last three to five years. These are natural cycles of expansion and contraction.
An analysis of a company's strengths, weakness, opportunities and threats -- better known as a SWOT analysis -- can ensure that your analysis is comprehensive and considers qualitative factors that may not be evident in your quantitative analysis. Note threats and weaknesses such as a lack of stability in historical financial performance, competitive threats or even existential threats. Important weaknesses include a company's failure to embrace technological advances, a general lack of innovation or management's unwillingness to reinvest earnings in new machinery, technology or human capital.
Include either summary or standard financial statements, preferably for more than one accounting period. Use these numbers to perform common-size and ratio analysis to support the quantitative portion of your paper. Include the analysis as an exhibit or exhibits within your investment paper or as appendices. The common-size statements show each income statement item as a percent of total sales, and each balance sheet item as a percent of total assets or liabilities, for competitive analysis. Use ratio analysis to cover size, growth, liquidity, profitability, leverage and turnover. Include a ratio and performance trend analysis and comparison to the company's peer group. Note any positive or negative trends. Use this analysis to provide compelling evidence of your subject company's financial strength relative to competitors or peers.
Conclude with your investment thesis, in which you suggest a specific action to be taken. Support your conclusions using exhibits such as valuation models, payoff structures and payback charts. Even if your thesis is to simply purchase a security you believe is undervalued, include results supported by a valuation model and explain these results in the context of the bigger investment picture. For example, sell-side analysts conclude their investment papers with a buy, sell or hold recommendation.
- Street of Walls: Building an Investment Thesis
- Washington University: SWOT Analysis
- University of Michigan: Industry Research
- Harvard Business School: Writing a Credible Investment Thesis
- Apple, Inc.: Securities and Exchange Commission Form 10-K Filing
- FT Press: Valuation for Mergers and Acquistions -- An Overview
- Accounting Coach: What are Common-Size Financial Statements?