A Look at Narwhal's In-House Research Process

Narwhal is unique in a number of ways, but one aspect that makes the company stand out from its peers is how it conducts investment research. Because of the time and effort required to effectively research investment opportunities, many financial advisors outsource their investment research. Narwhal is an outlier in that it conducts all of its own research in-house. While time intensive, Narwhal believes in the value that in-house research provides to its clients. Investment analyst Jason Seeb, who is at the forefront of the investment research conducted here, joins the discussion to outline what Narwhal’s investment process looks like.

How do you find companies to begin researching?

“We have a team of analysts and portfolio managers that are always working to come up with ideas, but really everyone at Narwhal plays a part in the process of brainstorming investment opportunities. Today, actually, we had an intern present an idea that we are pretty excited about that is now in consideration to go through the whole research process, so ideas can come from anywhere. We are always discussing the trends we are seeing at a macro level and a more micro anecdotal level and what companies could benefit from the trends. When ideas arise, we see if preliminary data-checks on those opportunities support the story that we think could play out. This gives us early indications of whether or not the opportunity is worthy of the full investment process.”

Break down the whole process from start to finish (high points)?

Pre-pitch:

“Once someone comes up with an idea, we do what is called a pre-pitch, which is essentially a skeleton of the full pitch process in the form of a one pager. We take the most important elements of the pitch process, or those that are most relevant to the company we are looking at and highlight those in order to see if the opportunity passes the initial screen and is worth devoting man hours to. We also run a quick valuation model at this stage as well. That pre-pitch will be presented to the investment committee to determine whether or not we think this is something we want to look into further. If it is, the analyst will begin the research process.”

Research Process (Pitch):

Our pitch process is based on two elements, the story of the company, which we call the mosaic, and the valuation of the company. The mosaic is comprised of “the three M’s”: the moat, the management, and the macro. The moat is an attempt to examine how well the business is positioned. We research the main competitors of the company, what substitutes for the product or service exist, the ability of the business to control the price of inputs and outputs, the margins that they achieve – all of this gives us a picture of where the business stands in its market segment. The management section is what it sounds like, we look at the experience of the management team, their history when it comes to mergers and acquisitions, their ability to manage the balance sheet, and their earnings reports (which can move stocks a lot). All of those pieces of information give us an idea of whether or not we can trust this group of people to do what is in the best interest of the shareholders. The last section is the macro. This is an examination of the macro economy at the present moment, where we believe it is in its cycle, and what the regulatory environment looks like as it pertains to the company in consideration, which is a big element to consider because government regulations can drastically change the outlook of a company. There is an additional aspect of the pitch that we include before we get into the valuation process which is what we call the bear case. If we have gotten this far in the process, we probably feel pretty good about the opportunity, so we use this bear case to help us take a step back to consider the counter argument. We come up with the three biggest challenges that the company is facing right now, trying to determine what could go wrong, and sometimes that simple exercise will be enough to push us away from investing in the stock. The final portion of the pitch is the valuation. We have a few different financial models that we look at. Some models fit certain companies better than others depending on the structure of the business, so that guides which models we use to complete the valuation, sometimes its one, sometimes its all of them, it depends on the type of business we are looking at.”

Investment Team Discussion:

“Once the pitch document is completed, it is sent out to the members of the investment team. Each team member will spend time on their own reading the pitch and considering the opportunity, and then the team will meet together and discuss what each member thinks of the company. The discussion ends in a vote as to whether or not we think this is a company we want to buy.”

How do we determine whether or not we act?

“It’s really looking at the entire picture, and it varies from stock to stock. You have to take in each aspect of the pitch and make the best decision that you can as to whether or not you want to buy, and if so, to what weighting you would want to buy. Sometimes everything lines up and it’s a quick decision by the committee to invest in the opportunity and sometimes there is one aspect of the pitch that doesn’t look like it should and that can be enough to prevent us from buying a stock. PayPal is a great example of this. This was the last pitched that I worked on. The research process revealed that PayPal had a really strong management team and was in a really fast-growing market, so the story was very attractive, but when I put it through our models, I couldn’t make the valuation work. We talked through the situation in an investment team meeting, and we agreed that PayPal was a company that we couldn’t justify buying now but was certainly one to keep an eye on. If the price were to drop into the range our models produced, we would buy without question, but until then we wanted to hold tight. We actually saw this play out; the stock pulled back and fell into our buy range, so we began to pick up shares. Again, its different from stock to stock but you have to consider all the aspects of the story.”

What aspect of the pitch process do you see as the strongest predictor of the future success of a company?

“It’s hard because I haven’t been doing this all that long, so I’m still trying to figure out which section gives me the best insight as to whether or not the idea will play out. For now, I would say that the business robustness section is the most revealing. Every analyst does their pitch process a little differently, but for me, I use this section as a pitch of the pitch. The rest of my pitch is more of a research report, but I use this section to dig in and determine whether or not I believe in the story of the company based off of the information gathered in all the other sections, so this is the section I use to try and sell myself and others on whether or not I trust the story.”

Have you had a time where the research pointed to a buy but for whatever reason the opportunity didn’t play out like you thought?

“Yeah definitely. One example is GM. GM has moved since I presented the pitch, but based on the thesis and the guidance from management, the stock should have moved a lot more if the market believes that they will be able to achieve what they say they are going to achieve. So that’s one where things lined up in the research process, and while its done well, it hasn’t done as well as it should have based off of all the data available, so we are hopeful that the story will continue to play out.”

***We had to take a quick pause as Natalie walked in with mini Christmas trees to decorate the conference room. We asked if she had anything she wanted to say to the people, but she declined, she’s too focused on getting the office in the holiday spirit.***

How early into the pitch do you start forming an opinion as to whether or not you are going to buy the stock?

“For me it’s pretty early. Most of the time, I’d say that I have a pretty good idea of where I stand before I start writing the pitch. That’s because I usually do a week of research before I start the pitch, so, I have gathered a good bit of insight already before I begin writing, which is typically enough for me to form an opinion. So, I’d say that its rare that my opinion changes once I start writing the pitch. I’m still doing research along the way as I’m writing, but typically I don’t find anything that forces me to change my opinion, with PayPal being the exception to that. I don’t think every analyst would echo that sentiment, that’s probably more of a personal thing from analyst to analyst."

This process isn’t a quick one, do you ever worry about missing out on an opportunity by having to complete all this research first?

“Sometimes, if we are convicted in an idea, we will start to build positions before the formal process has been completed, although those positions will be small until we have done thorough due diligence. In general, we would rather err on the side of caution and complete our research even if it means giving up 5% than rush in and miss something in the research that results in the stock going down.”

What stock has been the most interesting for you to pitch?

“One that I enjoyed much more than I expected was Blackstone. I don’t really know why but it was just more enjoyable than I thought it would be. Something I do really enjoy about the pitch process is getting to dive deep into all these different companies that make up different parts of the US and global economy. I’ve done pitches on Blackstone, which is in the financial sector, HCA which is a hospital chain, DraftKings which is a sports betting company, BWXT which is a company that supplies nuclear reactors to the US Navy, so the companies I’ve looked at are all over the board. Doing work on all these unrelated companies has given me the opportunity to learn about so many different things which has been really enjoyable. But yeah, for whatever reason Blackstone was a good one, it seemed to just flow right onto the page.”

What is the next stock on your radar?

“Right now I’m working on Merck which is a pharmaceutical company that is in the final stages of getting approval for an antiviral pill that is able to reduce COVID- 19 symptoms and reduce the overall risk of hospitalization, which will make a significant impact in how we are able to treat this virus. Merck has a number of other drugs as well, the biggest being a cancer treatment that is one of the most widely used cancer treatments in the world and is very profitable for the company. So that’s the pitch that I’m working through right now.”

How many companies have you pitch in your time at Narwhal?

"I would say probably 12 in my year and a half here."

Tell me about the famous “Seeb bump.”

“Yeah, so I started at Narwhal in the summer of 2020 after graduating from college, and the first stocks that I pitched all, coincidentally, seemed to go up 20-30% in the weeks after I pitched them. It was like clockwork, all the stocks that I pitched immediately popped and outperformed the market, so we started joking on our side of the office that everything that I touched turned to gold. We called this phenomenon the Seeb bump. Sadly, as the market tends to do to a newcomer, it got the better of me eventually. The stocks that were immediately winners didn’t keep that pace, so the Seeb bump died pretty quickly, but it was a good run.”