How to Develop a Thesis for a Company

Education Series

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Step 1: Finding a company

Investing your own hard earned money in the stock market can be nerve racking, especially for beginning investors. One way  to mitigate this fear is by researching the company you plan to invest in and developing a thesis about how well you think the company will do in the future. Developing a well-informed thesis for a company will likely give you a sense of conviction in your investments. Every Monday, we publish a newsletter where we provide a simplified version of this. In our brief stock breakdowns, we find general information, conduct qualitative and quantitative analyses, and determine bull and bear arguments (pros and cons) for a company. Here, I’ll show you how I go through those steps so you can develop theses on the companies that interest you!

The first step - which is often difficult - is to find companies that you deem to be worth your money. I am not a financial advisor, but my suggestion would be to observe products and services you use frequently in your own life. Some of the most common stock investments are known as the FAANG stocks - which stands for Facebook, Amazon, Apple, Netflix, and Google. We broke down each of the FAANG companies as part of the stock breakdown series mentioned above. While the FAANG companies operate in the tech space, there are plenty of other publicly traded companies that operate in the physical world. Think about your favorite chain restaurants (such as Chipotle or Starbucks) or products that you regularly purchase at the grocery store (such as Coca-Cola). There’s most likely other companies within your core competency. Your core competency might be an industry you work in or something you are very interested in and have more knowledge than the average person. For example, a pharmacist may be more tuned in to what is going on with different pharmaceutical companies while someone in the motor vehicle industry might be more familiar with companies that supply certain parts of vehicles. Everyone’s portfolio can be different and they can all be successful, which is part of the beauty of the stock market!

Step 2: Simple Company Descriptions

My first step in developing a thesis for a company is simple: I write down what the company does. This includes the products/services the company provides, the general space in which they operate, where they operate out of (what country), the general size of the company (for example, how many employees), when they were founded, and when they began trading publicly. For most companies, this information is fairly easy to find. I like to do a quick Google search of the company and look at the description on Wikipedia and a few other places like Yahoo Finance and our sponsor Financial Stock Data. These resources help you get a general understanding of what each company does and gives you a surface level understanding of the business.

Step 3: Perform a Quantitative Analysis

For a quantitative analysis, you generally like to see growth in the financials of the company to see that the company is continually improving. Legally, all public companies are required to report financial statements every quarter (every 3 months of the year) and submit an annual report. In these reports, companies are required to provide detailed financial information, including operating costs, revenue, and much more. Many companies include these quarterly and annual reports directly on their own websites (usually under an “Investor’s Relations” tab or something similar). If you can’t find the reports on the company’s website, just Google the company name followed by “investor relations” (for example, “Amazon Investor Relations”).  Below is a screenshot of the Tesla website showing the Investor Relations tab location. 

In these reports, companies generally have a press release where they highlight the financials, typically in table or bullet point format. They will often show their financials as raw numbers (usually measured in US dollars) and also in relative terms compared to the prior quarter and/or the same quarter of the previous year (referred to as “year-over-year” changes). Below is an example of a quarterly report from Alphabet, Google’s parent company.

There are many other metrics to look at, such as market capitalization, price to earnings ratio (P/E ratio), net margin (net income / revenue *100), and many others that we could spend a full article breaking down. We typically retrieve those metrics from our sponsor Financial Stock Data, however you can also quickly find these on Google with a simple search such as “Alphabet stock price.” Here’s the result:

Step 4: Perform a Qualitative Analysis

I also use quarterly and annual reports to perform a qualitative analysis. These reports often outline plans for the future, current risks, and details regarding company growth (including growth in employees, consumers or users, new stores, etc.). I also like to run a Google search to see what other stock analysts are saying about the company. Finally, I try to place the company’s information in the context of the “macro” environment. I ask myself: how is the company adapting to the current state of the world? COVID was a prime example of a change in the macro environment. When analyzing companies through COVID, one major question I asked about companies was how well they could operate with remote employees, supply chain disruptions, and lack of in-person interaction with customers. In general, I tend to focus my qualitative analysis on the current strength of the company and its ability to grow in the future. This analysis can lead into the bull and/or bear arguments we will describe below.

Step 5: Write out both Bull and Bear Arguments

Bullish and bearish theses can be developed by thinking about the pros and cons of the company. Bull and bear arguments can be developed from both qualitative and quantitative perspectives. Indeed, these arguments can include data on company growth (acquisitions, internal research and development, etc.), financial data (revenue, costs of operation), key leadership positions, employee retention, potential for government regulation, level of competition from other companies in the industry, public perception (for example, bad press may be seen by investors as a bear signal), and many other factors. If, after conducting your quantitative and qualitative analyses, you are leaning one way or the other, do your best to see the opposing side. If you cannot see the opposing side, it may be too good to be true or you may need to spend more time researching the company. Do your best to see both sides and to fully evaluate whether the company is worth your hard earned money! 

Step 6: Periodically revisit your thesis

While it’s often not beneficial (and can actually be a bit stressful) to check on your investments every day, it’s important to periodically check in on the companies in your portfolio. Read their quarterly and annual reports and place them into the update macro environment. Are they growing to the extent that you thought they would? Has their revenue slowed over the last several quarters? Is the market shifting toward a competing company? These are all things to keep in mind when trying to determine whether your thesis still holds water. 

Now’s your time to decide!

Now that you’ve completed your analysis, it’s time to decide if this company is a good investment for you. The keyword here is “you!” You can decide how you feel about a company and all the various factors that go along with it. Your conviction in the company will allow you to hold and ride through potential dips in the market, because the dips will come. It is not necessarily true that stocks always go up, but if the underlying fundamentals of a company are solid, the long term outlook for a company is usually bright. Now start analyzing companies to see which investments can help you grow your wealth!

Have a great rest of your week!

Brandon & Dan

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Disclosure:

The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.