Is tech a good coverage sector to start out in research?
As a current college undergrad interested in research, I’m thinking about sectors I would want to cover and I’m thinking about TMT due to the high degree of investor interest in the space. However, I’ve read that TMT isn’t a great place to start because you don’t learn that much valuation (fundamentals are often divorced from current stock prices) and technicals. Would a tech coverage be a good idea for someone who is starting out in sell side research and plans to move to the buy side?
You don't learn much valuation on the sell-side in general anyways.
But the mechanics of modeling and valuation are not the rocket science in this business (valuation: watch Damodaran or read McKinsey valuation book; modeling: take an IB modeling video course), it's the depth of industry knowledge and pattern recognition that drive variant views in your assumptions for buy-side success.
Thanks. So tech would be a good sector to start?
Yes.
Given your buy-side aspiration, you will need to manage your path to get there - it should be obvious that sell-side didn't hire you to teach you how to be a buy-sider.
But it's your responsibility to form your own views (that could conflict with your analyst's stock ratings) and have an objective view on what a business should be worth, the sooner you start doing that, the less time you will need to be on the sell-side, because at a buy-side interview, they expect someone who does know how to value a business in the right way.
I know others will say the opposite but this is not necessarily true from what I’ve seen. It’s not a bad sector especially if you’re interested in tech but the level of valuation/fundamental analysis is just on a completely lower level than many other sectors. Obviously there are different verticals within tech but a lot of sell side tech research on internet stocks for example is just valueless, fundamentals just don’t matter.
Would you say consumer discretionary would be a better place to start because there’s not only a lot of investor interest but there’s more modeling involved?
Telecom & Media is certainly a great sector to start with in ER. Many of these companies are relatively mature businesses (think T, VZ, TMUS, DIS) and trade more heavily off fundamentals / traditional business prospects.
Given the maturity of the industry, you will gain solid modeling experience due to the fact that the coverage firms have relatively stable cash flows and basically walk, talk, and act like a pure-play utility firm at this point. Most of the growth is inorganic where firms tap through the M&A business to acquire subsidiaries to boost their top and bottom lines (as core revenue growth becomes capped). For all these reasons, you will gain a broad skill set of how to value varies companies of size, primarily looking through a fundamental scope.
As for the last “T” in “TMT”, I’ve noticed that “Technology” has usually been broken off into its own separate sector from Telecom & Media for the sake that the firms in the tech industry are valued much different than traditional media/telecom players.
Tech firms are much growthier, making them more difficult to value on a fundamental basis. So much of their value is being derived in the future that your analyses will likely be very speculative in nature and you’re likely to value firms on a relative basis to the industry median (which also has stretched multiples too) rather than having any tangible DCF. Tech sector could be good if you’re focused more on small & mid cap names, rather than large cap. At least in tech, the mega cap names commonly have like 35+ coverage analysts, making it borderline impossible to add any differentiated value. If you work in mid/small cap, you might get better access to mgmt (considering it’s easier to talk to SFIX or BUMBL’s CEO than Tim Cook) and there’s less analysts.
All in all, TMT is a fine sector to start with, as the telecom/media industry gives you a strong foundation that you can take with you across many sectors. It might be more boring than “Tech” but it will undoubtedly give you more tangible valuation experience, if that’s what you’re looking for. If you’re an extrovert and are looking strictly to build your network with corporate management, smaller cap tech wouldn’t be a bad place either.
Thanks for the detailed writeup. I am also interested in consumer lifestyle brands (Peloton, Lululemon, etc) and there are analysts at the bank I'm currently working at covering that. What are your thoughts on starting my research career in that space? I can talk to people but am not super extroverted - think my differentiation would be more on the insight/analytical side vs. building relationships with management.
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