7 tips to optimize your stock coverage universe

By | July 31, 2013

Long term career success or failure for equity analysts is many times dictated by the universe of stocks they are initially assigned to cover. Early in their careers, most buy-side and sell-side analysts have to accept whatever they’re given. But if at some point you are asked to provide input in defining your stock universe, make sure to seize the opportunity because it’s usually short-lived. If possible, try to get ahead of the process and proactively ask your manager for some time to determine the best sectors and companies to cover before being assigned some dodgy obscure companies that nobody else wanted to follow. Here are some tips for you to take control and optimize your stock coverage universe:

1. If you know –or suspect- you’ll be given responsibility for a new universe of stocks, proactively create your wish list in advance (likely on your own time).

2. Determine how much influence you have in the process. Unless clearly stated, assume you have enough influence to be worthy of making a recommendation to your manager.

3. Starting with a list of stocks not covered by other analysts in your firm, rank their importance based on your firm’s metrics (e.g., trading volume or investment banking revenue for the sell-side and amount of holdings or a stock’s style appropriateness for the buy-side).

4. Determine how many stocks you can cover and still add value. Look within your firm for successful analysts to determine the number of stocks that can be closely covered. A realistic range is 35 to 50 stocks on the buy-side and 15 to 20 for a three-person sell-side team, but these figures should be lower for analysts new to a sector. To help gauge the number of stocks that can be successfully covered:

  • Identify the minimum requirements for success as defined by the most seasoned analysts at the firm (e.g.,do they have updated models for all of their companies or only for the names where they have strong conviction?).
  • Assess if you’ll likely have any colleagues or outside resources helping you.
  • Conduct a correlation of the stocks in your proposed sector and compare with stocks covered in other sectors to determine their homogeneity (i.e. do they trade similarly or very independently?).
  • If you’re looking at more than one sector, determine if there is any synergy in covering both, such as a food chain relationship or factors that influence both. To be of value, information you learn in one sector should give you a competitive advantage in following the other.
  • Conduct a news search by ticker for the past few months to determine how many unique news stories are likely to be generated (and thus need to be read) in a given day.

5. For each sector under consideration, narrow down the individual stocks from each sector into the following categories. If this list of candidates is still too long, narrow it down further by the stocks that are the most intriguing.

  • Must cover and not expected to cover due to size or appropriateness for portfolio or client base.
  • Potential candidate to cover driven by factors such as potential for upside surprise, number of sell-side analysts covering the stock, or the information the company provides in helping cover other stocks in the sector.

6. To avoid making enemies with colleagues, try to assess whether they have aspirations to pick up the firm’s uncovered sectors so this information can be incorporated into your final conclusions. Your desire to pick up a sector may need to be weighed with how much of a problem you’ll have with a colleague in doing so.

7. Present your ideas to your manager before a final decision is made so that you can influence the process. Provide your manager the work you’ve done and a few recommended options but make it clear that it’s the manager’s decision.

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