Equity Research and Recommendation Writing
Equity Research and Recommendation Writing tests whether an analyst can turn valuation into a clear, evidence-based view. The exam looks for a falsifiable thesis, a target price, catalysts, risks, and a recommendation consistent with expected return.
Core rules
- A recommendation should follow from expected total return versus the required return or a stated hurdle. Expected total return includes price change plus dividends.
- The thesis states why the market is wrong or why the company will outperform. It must identify the driver, the time horizon, and the evidence.
- Catalysts are events that force repricing: earnings, product launches, regulatory decisions, capital allocation, or management change.
- Risks must be specific and measurable, not “market risk.” Include downside scenarios and what would invalidate the thesis.
- A target price is a valuation output, not a prediction of the exact future price. State the valuation method and key assumptions.
Worked example
A stock trades at $40.00 and pays a $1.00 annual dividend. The analyst’s 12-month target price is $46.00. Expected total return is ($46 − $40 + $1) ÷ $40 = 17.5%. If the firm’s Buy threshold is 15% expected total return, the recommendation is Buy. If the target is cut to $43, expected return is 10.0%, below the threshold, so the rating should move to Hold unless another catalyst justifies a higher target.
Traps
Do not confuse a target price with fair value under every scenario. Do not write a Buy thesis that depends on a multiple re-rating without explaining why. Avoid ignoring dilution, leverage, or regulatory risk. A rating change should not be buried in prose; state it early and reconcile it to the expected return.