MAY 31, 2016

PERFECTING THE PITCH

REFINING THE STRUCTURE AND DELIVERY OF
A STOCK PITCH

Paul Johnson
Managing Director, Nicusa Investment Advisors

2016 GERSON LEHRMAN GROUP, INC. ALL RIGHTS RESERVED.

Paul Johnson
Paul Johnson runs Nicusa Investment Advisors, an advisory firm focused on helping CEOs and Boards of Directors deal with
strategy, capital allocation, shareholder value creation, and corporate governance. Paul applies his 30 years of experience as an
investment professional, combined with his more than 20 years as a business school professor, to help senior managers sort
through these critical strategic issues. Paul is a Senior Advisor to Bowen Advisors, a Boston-based M&A and strategic advisory
firm to emerging and high-growth technology companies. Paul's primary focus is to offer strategic advice to companies in digital
media and related communications technologies. Paul is the founder and investment manager of Nicusa Capital Partners, a
private investment partnership that he started in 2003. As an investor, Paul has invested in virtually all sectors of the economy.
He is also a Fellow at the Gabelli Center for Global Security Analysis at Fordham University. Prior to founding Nicusa, Paul was a
Managing Director in the Equity Research Department of Robertson Stephens, and a Senior Advisor with ExSight Capital.

2014 GERSON LEHRMAN GROUP, INC. ALL RIGHTS RESERVED.

2016

The goal is to outperform the market

The challenge is to get the right stocks in
the right portfolio at the right time

Outperforming the market generating alpha

=
The Holy Grail

Today

Year 1

Year 2

Year 3

Year 4
4

The Challenge
The goal is to outperform the market
The challenge is to
get the right stocks
into the right portfolio
at the right time
Successfully pitching is the key to overcoming this challenge!
5

We will add one more constraint

Your time!

The organizations most precious (and non-renewable) resource

6

How to get your idea into the right portfolio

Idea must be appropriate for the targeted portfolio
Idea must be custom tailored for each portfolio managers individual
investment criteria
Idea must be adopted
Failure to match the PMs investment criteria will result
in mistakes and contribute to underperformance
Failure to get the idea into the portfolio is no different
than having no good ideas
7

The Problem is a failure to communicate

It is very difficult (impossible?) for
the analyst to read the portfolio
managers mind, and vice versa
This disconnect results in wasted
time and mutual frustration
Frustration within an organization
is corrosive!
What we got here is... failure to communicate.*
* Cool Hand Luke, 1967
8

The two roles have different views

Analysts
Focused on being right with their
analysis
Focused on valuation
Focused on small set of
companies
Hate selling
Evaluated on the performance
of their recommendations

Portfolio Managers
Focused on why the market is
wrong
Focused on returns (over time)
Faced with
information/cognitive overload
Need to be convinced
Evaluated on the performance
of their portfolios
9

How does one bridge the gap?

Portfolio managers are busy and want actionable ideas communicated as
quickly and succinctly as possible
Analysts want portfolio managers to take action on their ideas
Fostering a close symbiotic relationship between the analyst and the
portfolio manager is the key (only way) to generating alpha
Both groups need each other
the stock market is far too competitive to not leverage all available resources
10

Key to idea adoption is a successful pitch

Elements in every pitch
Audience idea is appropriate for the portfolio manager
Delivery idea is conveyed quickly, clearly and succinctly
Content includes the key elements of why a stock is mispriced and how long
it will take to close the gap

Content

Delivery

11

Looking for a new HK apartment

12

Stated criteria
Price range, HK$
Location (near office or MTR)
Size (>1000 GFA)
Luxury apartment
Amenities (modern kitchen)
Modern building, not haunted
Nice neighborhood, near shops
Spacious, with natural light
Feng Shui
13

Criteria, parsed
Quantitative:
Price range, HK$
Location (near office or MTR)
Size (>1000 GFA)

Qualitative and subjective:

Nice neighborhood, near shops
Spacious, with natural light
Feng Shui

Qualitative and objective:

Luxury apartment
Amenities (modern kitchen)
Modern building, not haunted

14

Parse into qualitative or quantitative criteria

Quantitative

Qualitative

Numerical Criteria

Objective Criteria

Subjective Criteria

Price range, HK$

Luxury apartment

Nice neighborhood

Location (office or MTR)

Amenities (modern kitchen)

Spacious, with natural light

Size (>1000 GFA)

Modern, not haunted

Feng Shui
15

Looking for a new investment idea

16

PMs criteria
Market cap
Historical growth rate
Trading volume
Return on capital
Analyst support
Internet based

Asia focused
Attractive valuation
Strong competitive position
Good growth prospects
Catalyst

17

PMs criteria parsed

Quantitative

Qualitative

Numerical Criteria

Objective Criteria

Subjective Criteria

Market cap >$10 billion

Broad analyst support

Attractive valuation

5 year growth >10%

Outperformed Index

Strong Competitive Position

>$1m daily volume

Internet-based

Good growth prospects

ROIC > 15%

Asia focused

Catalyst
18

You pitch a company

(035420 KRX)

http://www.naver.com/

Asia-based Internet company

US$19.4B market cap
Market leader in Internet search in
Korea, NaverPay
2015 ROIC = 22.8%
5 year compound growth ~11%
Seongnam, SK
LINE IPO (catalyst)

19

 but the PM passes on the idea

20

Parse into qualitative or quantitative criteria

Quantitative

Qualitative

Numerical Criteria

Objective Criteria

Subjective Criteria

Market cap - $19 billion

Broad analyst support

Attractive valuation

5 year growth - 11%

Outperformed Index

Strong Competitive Position

>$1m daily volume

Internet-based

Good growth prospects

ROIC > 22%

Asia focused

LINE IPO
21

Parse qualitative data into objective and subjective

Numerical Criteria

Objective Criteria

Subjective Criteria

Market cap - $19 billion

Broad analyst support

Attractive valuation

5 year growth - 11%

Outperformed Index

Strong Competitive Position

>$1m daily volume

Internet-based

Good growth prospects

ROIC > 22%

Asia focused

LINE IPO
22

Did we hit the qualitative criteria?

Numerical Criteria
Market cap >$10 billion
5 year growth >10%
>$1m daily volume
ROIC > 15%

Objective Criteria

Broad analyst support

Outperformed Index
Internet-based
Asia focused

Subjective Criteria

Attractive valuation

?
?
?
?

Strong Competitive Position

Good growth prospects
Catalyst

23

Why didnt PM bite?

Explicit
Numerical Criteria
Market cap >$10 billion
5 year growth >10%
>$1m daily volume
ROIC > 15%

Implicit
Objective Criteria

Broad analyst support

Outperformed Index
Internet-based
Asia focused

Subjective Criteria

Attractive valuation

?
?
?
?

Strong Competitive Position

Good growth prospects
Catalyst

24

Explicit versus Implicit Investment criteria

Quantitative data is explicit no reason not to hit the criteria
Market cap, historical growth rate, trading volume, ROIC

Objective qualitative data is explicit no reason not to hit the criteria

Analyst support, Outperformed index, Internet-based, Asia focused

Subjective qualitative data is implicit much harder to hit

Attractive valuation, strong competitive position, growth prospects, catalyst

25

Explicit versus implicit criteria

Explicit criteria can be clearly stated and is unambiguous, and should
be straightforward to match
Implicit criteria is, by definition, implied and not well articulated, and
often hard to match
Hard to figure out what attractive valuation, strong competitive position,
good growth prospects, or catalyst means
when beauty is in the eye of the beholder

The challenge (always) is figuring out the audiences implicit criteria

26

Just bring me stocks that will outperform

We try to find some set of statistics that motivate us to act. The analogy I have always used is that when
you go into the beer section of the supermarket, you see 25 different brands of beer. Theres something
that makes you reach for one particular brew. In the parlance of the stock market, theres some
combination of return-on-equity, growth rate, P/E ratio, dividend yield, and asset value that makes you act.
Graham & Doddsville interview with Leon Cooperman Fall 2011
27

How in the world would anyone know

Coopermans explicit, let alone implicit,
investment criteria from that statement?

28

Hurdles to overcome in idea adoption

PM will listen if you satisfy their explicit criteria
They will adopt the idea only if you satisfy the implicit criteria
Proponent

Portfolio Manager

Message

Content

Audience
Listens

Audience
Adopts

Delivery

Chemistry

BARRIERS

Satisfy Explicit Criteria

Satisfy Implicit Criteria

29

Socialize ideas early to save time!

Idea generation (research) and adoption (pitching) take a lot of time
Most precious (and limited) resource is the analysts and PMs time
Idea socialization improves time efficiency
Need to have communication throughout the entire process so
analyst is not working in a vacuum

30

Implicit criteria requires communication

PMs responsibility
Do not expect the analyst to be a
mind reader
Make sure analyst has all of your
explicit criteria
Be aware that your implicit criteria
isnt even obvious to you, much
less your analyst
Try to communicate as many details
about your implicit criteria as
possible providing no feedback
is unacceptable organizationally

Analysts responsibility
Make sure you are crystal clear on
all of your portfolio manager's
explicit criteria there is no
excuse not understand this criteria
Carefully observe portfolio
manager to better understand
implicit criteria
Understand why companies make it
into the portfolio
More importantly, understand why
companies are rejected!
31

Matching the PMs investment criteria is

necessary but not sufficient
Portfolio managers are busy and want actionable ideas
communicated as quickly and succinctly as possible
Most analyst hate selling their ideas often feel the
recommendation alone should sell itself
An inability to communicate a good investment idea is the same as
not having an idea at all
32

the idea must be heard

Content and delivery of the message are also critically important
Address why the stock is mispriced and how the mispricing will be corrected
Time pyramid can be effective

30-seconds to hook the portfolio manager

2 minute presentation to succinctly explain the key elements of your investment idea
5-10 minute to conduct interactive Q&A
Research report to explain the rest

33

Many (most) analysts hate pitching

Feel they are paid to analyze, not sell
Feel recommendation should sell itself
Highest conviction names into the analyst portfolio / research list
Discouraged when the PMs do not adopt, especially when the idea works
However
PMs are the ultimate decision makers
You are making your customer do a lot of the work
And your customer is not buying your product

Need to foster a symbiotic relationship

34

Keys to successful pitching

Tell a story

Keep it simple
Give them something for their money

Use the time pyramid

Make PMs ask questions

Let PMs match your analysis to their implicit criteria

Separate what you know from what you think

Hard to argue with facts
Keep any debate centered on the conjectures

Its not my responsibility to listen, its your responsibility to make me hear.

- Robert Herjavec, Shark Tank
35

Better communication between analyst and

portfolio managers results in more alpha
The content needs to show that there is
evidence of a genuine mispricing
The target price can be estimated with accuracy and precision
a sufficient gap between market price and target price
identifiable path (catalyst) that will close the gap between
current price and target price

36

 less frustration
Know the PMs investment criteria
No excuse for not fully understanding his explicit criteria
Work collaboratively to understand his implicit criteria
Socialize ideas early
Get to know if the portfolio manager will adopt
Kill bad ideas before too much time has been invested
Co-op their interest and support

37

 and more time

Delivery is critical
Analysts need to communicate clearly, quickly and succinctly
PMs should cooperate by giving undivided attention and direct
feedback

38

Q&A
Please submit your questions via the text box
on the left side of your window.

All questions will remain anonymous.

2016 GERSON LEHRMAN GROUP, INC. ALL RIGHTS RESERVED.

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2016 GERSON LEHRMAN GROUP, INC. ALL RIGHTS RESERVED.