Equity research interview questions, pitch, model and note

Banking interviews ask if you can work on a deal. Research interviews ask if you can defend a call on a stock.

1. Part 1

   Two stock pitches

   One Buy and one Sell or Hold, in the sector you want. The second one shows more judgment, because anyone can like a stock.

   Stock pitch template

2. Part 2

   A model you can update

   Be ready to build or update a three-statement model of a public company and carry it to EPS and a price target, possibly against a clock.

   DCF model template

3. Part 3

   A short written note

   Rating, target, what changed and why, in about a page. Practice writing one in an hour, because a model with no note is half the job.

4. Part 4

   Your sector and the market

   The main companies, the two or three numbers that move them and the debate this quarter. LBO and merger models matter less than in banking. Accounting and valuation matter as much.

Same accounting, different client and a different output.

1. Who you serve

   Investors, not companies

   Goldman's research clients are asset managers such as hedge funds and mutual funds, and asset owners such as pension funds and endowments. Bankers advise the companies.

2. What you make

   Notes, ratings and targets

   A Morgan Stanley equity research executive director describes collecting data, building financial models and publishing reports on her team's views.

3. How you're judged

   On the record

   A rating and a price target are public and dated. That is why interviewers push on what would make you wrong.

4. The day

   News first

   The same director starts each day with the news and filters out the few stories that matter for her stocks.

A made-up company, to show the math behind a research call. The numbers and the rating scale are ours. Each bank defines its own ratings.

1. The setup

   A stock at $62

   It pays a $1.50 dividend. The Street expects $4.40 of EPS over the next 12 months. Your model says $4.80, 9% above consensus, because freight costs fall faster than others assume.

2. The target

   $4.80 × 15 = $72

   15 times is the stock's own five-year average forward P/E. Today it trades at about 14.1 times the Street's EPS, so you aren't asking for a big re-rating. The call rests on earnings.

3. Total return

   About 18.5% over 12 months

   ($72 − $62 + $1.50 dividend) ÷ $62 is about 18.5%: 16.1% from the price and 2.4% from the dividend.

4. The rating

   Buy, on our scale

   Our scale: Buy above 10% total return, Sell below 0%, Hold in between. 18.5% clears 10%.

5. The Street's number

   At consensus it's a Hold

   $4.40 × 15 = $66, a total return of about 8.9%. The whole Buy rests on your extra $0.40 of EPS, so lead with why you're right about it.

6. The probe

   Below 13.9 times, it's a Hold

   A 10% return needs a price of $62 × 1.1 − $1.50 = $66.70. $66.70 ÷ $4.80 is about 13.9 times. Know where your call breaks before you're asked.

Short answers, tied to the work itself.

1. 1

   Why equity research and not investment banking?

   What a strong answer does

   Talk about the work: one sector, public companies, a view you publish and get judged on. Hours and pay don't count as reasons.

   • “What do you think a research associate does all day?”
   • “Would you take a banking offer over this one?”
2. 2

   Why the sell side and not a hedge fund?

   What a strong answer does

   Breadth and training: a whole sector, many investors to talk to and a senior analyst to learn from. Don't run down the buy side.

3. 3

   Which sector would you want to cover, and why?

   What a strong answer does

   Name the sector, the numbers that drive it and one debate investors are having about it right now.

   • “Who are the three biggest companies, and how do they differ?”
   • “Which of them would you rate Sell?”
4. 4

   Walk me through your resume.

   What a strong answer does

   Two minutes, ending on why research. Point to anything where you wrote, modeled or followed a stock for months. Practice it, see a model answer

Have a Buy and a Sell or Hold ready, in the same sector.

1. 5

   Pitch me a stock.

   What a strong answer does

   Rating and price target first, then two reasons, where you differ from consensus, the catalyst and the main risk. Practice it, see a model answer

   • “Why hasn't the market priced this in?”
   • “What does today's price already assume?”
2. 6

   Now give me one you'd rate Sell or Hold.

   What a strong answer does

   Show what the market is too optimistic about and why the stock can fall even if the company does fine.

   • “What would make you upgrade it?”
   • “Why not a Sell instead of a Hold?”
3. 7

   Where is your estimate against consensus, and why?

   What a strong answer does

   One line item, sized: your EPS, the Street's EPS and the reason for the gap. The worked target above lives on a $0.40 gap.

4. 8

   What would make you change your rating?

   What a strong answer does

   A specific number or event, decided now. Name what you'll listen for on the next earnings call.

   • “And if the stock is up 20% next month?”

Barclays names valuation, accounting and financial modeling as the skills its research interns build.

1. 9

   Walk me through how the three statements link.

   What a strong answer does

   Net income to cash flow, cash flow to the balance sheet, retained earnings closing the loop. Two minutes, no detours. Practice it, see a model answer

2. 10

   Depreciation goes up by $10. What happens to the three statements?

   What a strong answer does

   At a 25% tax rate, net income falls $7.50, cash rises $2.50 from the tax saving and PP&E falls $10. Both sides drop $7.50. Practice it, see a model answer

3. 11

   A company beats on revenue but cuts guidance. You have two hours to update the model and write a note. Where do you start?

   What a strong answer does

   Actuals first, then the lines guidance changes, then EPS and the target. Write the headline before the detail: what moved in your numbers and whether the rating holds.

   • “Which line in your model moves the most?”
   • “Do you change the price target today?”
4. 12

   How would you forecast revenue for a retailer?

   What a strong answer does

   From drivers: store count times sales per store, with new stores and same-store sales kept apart. Say which assumption the stock depends on.

Every answer here should end in a price target or a rating.

1. 13

   How do you set a 12-month price target?

   What a strong answer does

   Forward EPS times a multiple you can defend, plus the dividend, gives a total return that maps to the rating. See the worked target above.

   • “Why that multiple and not the sector's?”
   • “What does a DCF say next to it?”
2. 14

   Walk me through a DCF.

   What a strong answer does

   Cash flows, discount rate, terminal value, then the bridge to equity value per share. Then say how you'd weigh it against multiples. Practice it, see a model answer

3. 15

   Two companies earn the same. Why might one trade at a higher P/E?

   What a strong answer does

   Growth, returns on capital, risk and the quality of earnings. Tie each one to a pair of companies in your sector. Practice it, see a model answer

4. 16

   When would you use EV/EBITDA instead of P/E?

   What a strong answer does

   When peers have different debt, tax or depreciation. For banks and insurers, where debt is the business, P/E and price to book. Practice it, see a model answer

How you'd do the job on a real morning.

1. 17

   A company you cover reports before the open. Walk me through your morning.

   What a strong answer does

   Release against your numbers and consensus, the call, the model, then a short note out fast. Goldman says time to market is of the essence.

   • “What goes in the first two lines of your note?”
2. 18

   In three sentences, why should a portfolio manager care about your stock?

   What a strong answer does

   The rating and target, the one thing the market is missing and when it will show. Writing short is the skill being tested.

3. 19

   How do higher interest rates affect the stocks in your sector?

   What a strong answer does

   Through the discount rate and through the businesses: borrowing costs, demand, margins. Name one stock that gains and one that loses.

• A pitch that agrees with the Street

  If your EPS matches consensus, there is no call. Know your number, the Street's and why they differ.

• Only Buys

  A list of stocks you like reads like a fan's list. The Sell or Hold is where interviewers test judgment.

• A model that can't be updated

  Typed-in numbers and no checks. A research model gets updated every quarter, often within hours of a release.

• Burying the call

  A note that opens with background. Put the rating, the target and what changed in the first lines.

For a first-round or final-round research interview.

1. Days 1 to 4

   Pick two stocks

   Same sector, one Buy and one Sell or Hold. Read the latest annual report and the last two earnings calls for each.

2. Days 5 to 8

   Build the model

   Three statements, revenue from drivers, EPS for two years and a target. Find the consensus EPS and write down why yours differs.

3. Days 9 to 11

   Write the note

   One page: rating, target, thesis, your estimate against consensus, catalysts and risks. Cut it until each sentence earns its place.

4. Days 12 to 14

   Say it out loud

   A two-minute pitch, then the follow-ups on this page. Time yourself on the earnings-morning question.