In a recent blog post, “Giving Life to Your Investor Presentation,” David Calusdian suggests a number of valuable ways to improve not only the investor presentation itself but importantly the delivery of the content. One critical element identified by David is the development of a strong investment thesis that ultimately binds the presentation together. What are the secret ingredients that make for a compelling investment thesis? The answer to this question lies with investors and Wall Street analysts – your audience. As a former equity analyst, global sector head and portfolio manager who’s constructed, presented and reviewed hundreds of investment theses, here are several elements worth mentioning:
- First, many investors may not understand wavelength-division multiplexing or chemical vapor deposition. They will, however, understand accounting terminology and a broader financial language, allowing them to standardize and compare companies across diverse industries. Don’t ignore this. Embrace it. Use this financial language including core revenue growth, operating margin leverage and capital returns to reach out, command attention, and explain why investors should take a position in your company.
- Second, though it’s important to highlight your core product or service, it is vital to include an investment thesis point that clearly articulates the top-line growth trajectory of your organization, organically or through acquisitions. International growth, technology adoption or re-invigorating existing markets all will resonate positively within your audience’s financial mindset. New products that penetrate existing markets or open up entirely new markets encourage investors and sell-side analysts to assign a higher valuation multiple to a stock, purchase additional shares and help lift its price.
- Third, revenue growth alone is not acceptable. Though not every investor will be a staunch Graham and Dodd practitioner, most agree that operating leverage is necessary to generate free cash flow that unlocks valuation. Therefore, a second investment thesis point should focus on the company’s ability to drive operating profitability. Either through fixed cost leverage or Lean cost efficiencies, operating leverage can come from a number of sources. Don’t be afraid to highlight these.
- Lastly, we now have built an investment thesis around a company that generates revenue growth and operating leverage. Are we finished? Not quite. It simply isn’t good enough to generate free cash flow. In today’s financial marketplace where you compete for a finite amount of investor dollars just as aggressively as your company competes in the physical marketplace, management must demonstrate that it’s a judicious purveyor of capital. What you do with the capital is just as important as how you generate the cash flow. Balance sheet metrics or returns on capital can be instrumental in providing your current and potential shareholders with a report card on how well you managed their capital.
In conclusion, don’t forget to speak the financial language of your audience when building an investment thesis. Compelling theses offer revenue, operating leverage and returns elements that communicate a story that is best understood and accepted by investors.