“How much can you know about yourself if you’ve never been in a fight?”
– Chuck Palahniuk, Fight Club
Okay. First test question for you:
Which of the following actually happened to me?
A) Suspended from high school for smoking in the restroom between class
B) Fired from my first job as a grocery store clerk
C) Failed Level II of the CFA … twice
D) Punched in the face at a “Smash Mouth” concert
E) All of the above
F) None of the above
The correct answer?
E.
All of the above.
Are you surprised? If so, you’re not alone. Most people I meet—particularly the people I work closely with—are flabbergasted (and amused) by the stories of my past.
The irony here is not lost on me. After all, these “fact patterns” do not correlate with that of a successful career in equity research. Here’s another fun fact… my SAT score was 1550 (out of 2400). To say that I was on the wrong side of mediocre, would be an understatement.
After applying to 21 different colleges, I somehow managed to successfully con the good people in the admissions department at Marquette University into accepting me on a “conditional” basis. I was already on academic probation and I hadn’t even started yet. Eventually, I worked my way into the business school where my finance professor called me “scrappy.”
I remember having a full-blown anxiety attack during my first stock pitch to the Marquette investment committee. That was fun.
The truth is I always wanted to be in equity research. I would build models and post them on Seeking Alpha in my free time (see if you can dig them up!). It was apparent that I was never going to travel down the traditional banking, business school, hedge fund/private equity route. Even though I did reasonably well in undergrad, there was simply no way whatsoever I could compete on paper against kids graduating with Ivy league educations or from target schools.
I was a solid B student. Cs on tests and As on projects.
So, what was my edge?
In one word? Tenacity.
The way I figured it, if I wasn’t smarter than my competition, and if I didn’t have the “golden ticket” diploma from Yale (like many of my current colleagues), then I was going to have to out-hustle, outwork, and think differently. In other words, I had to force my way to the top through sheer grit and determination. Most of which came very naturally to me considering I marched to the beat of my own drum all my life.
Looking back, I have always been motivated to find the right answer. If I didn’t understand or agree with something, then I had a difficult time pursuing it. Most of the time I would fight against it. Some call it being stubborn, but stubborn implies ignorance. I made every effort to learn and understand the other side before making a decision.
Fortunately for me, as it turns out, researching stocks is not so different!
Born and Bred
With this background in mind, it seems only fitting that my equity research career would be born and bred here at Hedgeye. As you presumably know by now, we are truly an independent research shop. We are nothing if not committed to non-consensus thinking and hunting for the right answers.
It’s also fitting that my colleagues gave me the nickname “Free Bird” (which I love by the way).
Process, Process, Process…
The process I established covering Internet, Media and Telecom stocks is a collection of what I observed as best practices from the research veterans I am fortunate to have as colleagues. It is also the process I used and battle-tested covering Healthcare IT stocks with many successful long/short calls.
I’ll let you review the process slides below for more detail… but it goes something like this.
- Measure and map the industry
- Know the company inside out
- Be data dependent
- Focus on what really matters
- Valuation is not a catalyst
- Above all else, be intellectually honest
Sound familiar? It should. Especially if you are a Hedgeye subscriber.
I tell every prospect that I meet… While it may take time to get a ticker completely through my process, it’s worth it. Because what comes out in the end is a high conviction, high hit-rate stock call. I like to think of it as the Disney, tent-pole, strategy to idea generation and research production. Focus laser like on quality, conviction and a high hit rate. Not the Netflix, cover the waterfront, shots on net, be all things to all people strategy.
The mistakes I have made picking stocks are when I have tried to short-circuit the process. And my biggest problem right now is where do I focus my time—time itself being the biggest enemy of research.
But, so far so good. The process is working. Short Netflix (NFLX), Long Disney (DIS), Long Pinterest (PINS), Long Roku (ROKU) and more to come. I have no shortage of investment ideas. I am actually hosting an institutional call on 8/27 to run through the work we have done on ROKU and why we think it is a $200+ stock in the next 12-24 months.
And while I know I will inevitably be wrong at times and make mistakes, I will continue to #learn, #iterate and #evolve.
(I hope this Early Look ages well!)
Here is last test question:
Which of the following happened to me?
A) Successfully quit smoking 8 years ago
B) Got my job back at the grocery store and worked my way up to supervisor
C) Successfully passed the CFA
D) You should see the other guy…
E) All of the above
F) None of the above
The correct answer?
E.
All of the above.
Our immediate-term Global Macro Risk Ranges with TREND signal in brackets are now:
UST 10yr Yield 1.47-1.74% (bearish)
SPX 2 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 60.01-62.48 (bullish)
REITS (VNQ) 89.35-92.34 (bullish)
Financials (XLF) 25.78-27.32 (bearish)
Shanghai Comp 2 (bearish)
DAX 117 (bearish)
VIX 15.01-23.86 (bullish)
USD 97.10-98.61 (bullish)
Oil (WTI) 51.77-57.11 (bearish)
Gold 1 (bullish)
Copper 2.54-2.62 (bearish)
#KeepGrinding #StayTeachable #Evolve
Andrew Freedman, CFA (AKA “Free Bird”)
Your Communications Sector Head
