Your Narrative Is Not An Investment Thesis

“An investment thesis is a reasoned argument created by investors to justify an investment decision, supported by data, research and analysis”

In our experience working with public management teams, there is constant confusion about what an investment thesis actually contains and how it differs from other forms of communication with external audiences. The major difference between a narrative or a company’s marketing materials and a thesis is that investors expect companies to take it to the model - the arguments in a thesis must be supported by data with clear key performance indicators (KPIs) that enable the market to properly appreciate the important drivers of valuation.  For companies that are entering the public markets for the first time, it is vital that you frame this argument, easing the job for the analysts so that they can quickly ascertain those key elements that will directly impact the company’s stock price. Similarly, for an already public company that either lacks a thesis or is going through a strategic pivot, a thesis must be refreshed to reflect the updated strategy and the drivers of valuation.

Investors are a Unique Audience that Digests Information in a Structured Fashion

Between managing their existing positions, marketing and internal operational responsibilities, many portfolio managers may only have a few hours a week to evaluate new investment ideas.  Companies need to tell a compelling story in a succinct manner, to reduce the friction for investors and allow them to rapidly get up to speed on a company’s fundamentals.  If the thesis is not clear, lacks compelling supporting metrics or simply is poorly organized, an investor will simply move on to the next opportunity. Providing all of these key drivers of the business in a clear and compelling manner ensures that the stock is easy for the market to underwrite as an investment.  

A Thesis is an Argument That Must be Supported by Data

If any element of the thesis is not supported by tangible datapoints either directly or more holistically, it should not be included. Types of data required are the company’s financials, KPIs, and market data. Other items that impact assumptions supporting the valuation argument include a well reasoned corporate strategy, firmly established management credibility and effective investor communication which can all contribute to a higher multiple and a lower weighted average costs of capital (WACC).

Communications and Marketing Efforts are Important for the Investor Audience

The materials and efforts that your communications, marketing and public affairs groups deliver are important to support the investment thesis and are a vital part of maximizing the impact of an investment thesis.  If these functions are not carried out in collaboration to amplify your investment thesis, companies are not maximizing their valuation opportunity. Investors are trained to quickly spot inconsistencies in messaging which will raise concerns and will likely negatively impact valuation.  A coordinated program developed with a focus on how investors process information can have a material impact on valuation.