A lot of what we are going to talk about is similar in form to the case study performed solely at the office. Generally speaking the analysis will not be too dissimilar. You are still going to discuss expectations and valuation and capital structure. But you are going to do it in greater detail, and with greater presentation. Remember, the amount of time given is a key factor in determining how much work to perform: You could be given a week, or maybe a few days. For our purposes, let’s assume you are given the case study, and then given a week to complete it.

Unless otherwise specified, your resources at this point are unlimited. I have yet to hear of fund limiting the applicant’s use of certain resources on a take-home case study (i.e. “You can only use the 10K from last year”). Because you can draw on so much information, you are going to need to go FURTHER to differentiate yourself from other applicants. At this point in the process, there will be probably 2 to 3 other people competing for your position. How are you going to stand out given that the other applicant are probably just as qualified as you?

I would take the first few days given and read as much material on the company as possible: Annual reports, sell side reports, commentary from the internet, proxies, industry magazines, industry studies, competitor’s annual reports, etc. Dig deeper on this one – do searches on the CEO/CFO and see if you can find them speaking anywhere at industry conferences. If there has been a recent change in management, dig into the history of the current CEO/CFO and see how they did at their former position. Were they strong capital allocators? Did they grow just to grow?

After you have beaten every bush out there for information, it is time to start doing some of your own due diligence. This process will depend on the company at hand, but effectively you need to be contacting three types of people 1) Management / IR 2) Competitors 3) Customers/Suppliers/Low-level workers.
Let me discuss each in detail.

Contacting management/IR: After going through mounds and mounds of information, you are bound to have questions. These questions may come from some discrepancies you heard in the last conference call or maybe on a simple accounting concept that you may not quite understand from the most recent 10K. I would suggest first contacting IR and being as friendly as possible with your questions. Do not be adversarial as you want these people on your team. Why? Because unfortunately a lot of times these people are the gate-keepers to the CEO/CFO. At the end of your initial conversation with the IR personnel, you should say something to this effect: “I was wondering if we could set something where I could talk with the CEO/CFO for a few minutes later in the week. I will probably only need 15 or so minutes. You think that could be arranged?” …. Sometimes they will say no. And sometimes they will say yes.

If you get a yes, you obviously need to get moving because your final hedge fund interview is only 5 days away. If you do get a chance to speak with the CEO/CFO, you will want to ask them some questions about their thoughts on allocating capital, and some thoughts about the future. Even if you only get fluff from them, you have done the hard work speaking to management which will show you go the extra mile during the interview process.

Contacting Competitors: Theoretically, if you play this right, this is where you should get the most information on the company you are doing your case study on. The reason is that people view their industry very differently depending on their relative market shares. Meaning, a #2 competitor in a certain industry will have different thoughts on pricing mechanics, volume trends, future on the industry, than the #1 competitor. Further, a lot of people in the industry know one another, and know one another’s outlook/strategy. Differentiating between these may bring to light certain dynamic trends that would not be readily apparent from simply reading a sell-side report.

When you call these competitors, you are not going to start out by asking about your “case company.” You are going to want to build a rapport with these people by asking them questions about their own company and their own thoughts on the industry. From here you can drop in things like: “How do you think (case company) thinks about pricing over the past few years and what does that mean for you and the industry?” Sometimes, you will again just get a lot of fluff, but every now and then you might get a spiteful SOB that really likes to sock it to his competitors. If I were you, I would call at least three or four competitors. You could get a good number of sound bites/relevant information that you could use when presenting your case. Again, even if the information you draw from these conversations is different from what your interviewers want to hear, you are showing you have gone the extra distance in seeking out information.

Finally, supplier, customers, and lower level workers: This is by far the hardest of the process, and requires the most amount of pushing yourself to dial the numbers and asking questions. You will be hung up on. You may not get any information that is relevant to your case study. But on the off-chance that you do get information, this information could be game-changing. For example, I once called up a number of customers for a company that manufactures pipes used in infrastructure construction. Every one of them told me that their orders were being pushed back because of state/municipal budget deficits and they had no idea when spending would return. Now this information is good – but it becomes great when management is telling the analyst / sell side community that orders have no slowed down as of yet. Was the CEO lying? Probably not – he was probably just relaying what his COO was telling him – who was relaying information his subordinates were telling him, etc, etc. A lot can be lost in translation when there are five or six layers between the sales force and the CEO.

Effectively, the analyst community and management is setting expectations that are no way close to reality – and that’s when the information becomes GOLD.

The question then becomes – who to call? In honesty, I think it depends on the industry. Hopefully, when you spoke to management and their competitors you got same names of people you could follow-up with. If not, industry magazines / rags and Google searches will save the day. If it were a retailer, I would call up 30 of the stores and just chat up the customer service professionals. If it were a tech company, I would contact some of their larger distributors or suppliers. Just keep dialing – give it a few hours at least – if you can’t seem to be breaking any ground – you at least put in the effort.

Now you are equipped with LOTS of information – How are you going to distill it down into something presentable. As before, we want to come up with what the market expectations are for our company, and want to present information that conflicts / supports those expectations. As in the hedge fund case study you perform at the office, you want to understand the drivers of a business and then model those drivers out. The market, generally set by the sell-side, will have expectations for a company’s volume, or sale per square foot, or whatever the drive may be. Hopefully, the qualitative information you collected from management, competitor, suppliers, will give you better insight into those drivers than your peers.

You then build the model. If I were you, I would do a full-blown income statement, balance sheet, and cash flow working model. This model should be heavily footnoted with assumptions on things like days sales outstanding, deferred tax assumptions, etc. Doing a three-statement model shows competency in excel. Make sure the formatting looks like a banker spent a few solid all-nighters on it as well.

Equipped with the model and your drivers, you can then build up valuation metrics. I would do all three of the big ones: Comps, Precedent Transactions, and a Discounted Cash Flow. For comps, do all the relevant ones to the industry. For precedent transactions, look at as many recent proxies in the industry as possible – reference / footnote these as well. And for discounted cash flow, make a sensitivity matrix with discount rates and terminal values to show that you understand that DCF’s are simply approximations.

With valuation and model in tow, I would slap together two pages at most – with lots of bullet points with your thesis and why you think the stock is over or undervalued. If you come up with the valuation being “uncertain” i.e. a hold – then look for somewhere else in the capital structure that may be appealing. I have never really liked it when potential applicants come in and give basically a “No Opinion” – Yes, there are times when a stock price is accurately reflecting all information out there – but this isn’t just a random stock – this is a stock that was given to you where the fund probably has some preconceived notions about – I doubt they would give you something they have not already looked at.

With your thesis, valuation, and model in tow, you are ready to present. You may want to also have a handout backing up your assumptions on drivers versus the market expectations. On this, you would lay out some of the conversations you had with management/competitors/customers etc, with as many quotes as possible. Again we are trying to distinguish you from YOUR competitors in this hedge fund interview process.

As I wrote in the previous post: “After you have presented your hedge fund case study, you will be barraged with questions. You will not know the answer to every single question, but you should the majority. If you do not know the answer to the question, do not make up an answer.”

Again – this is true – but I would not give the same reason – I would try to re-frame the question into something you do recall from a 10K – Further, you should bring as much reading material with you as possible – this material should be earmarked, highlighted, etc for this specific reason – so that if you do get pressed for an answer – you will be able to come up with one.

And remember – you have done the hard work – now its just time to close the deal – and get hired into that hedge fund job you’ve been working so hard for.