Test Your Investment Thesis through Market Research 16 Jan 2014

Test Your Investment Thesis through Market Research

The first task of every investor is to develop an investment thesis. There are various strategies for investing, macro, event driven, fundamental and technical approaches. All of these strategies, maybe with the exception of purely technical, can benefit from the use of market research.

Market research helps investors develop, identify and test their investment thesis, however most do not use it. Investors all too frequently take a wait and see approach. While company earnings reports and other events do reveal progress towards the thesis, it is often too late to initiate a position in the security based on the news. At this point, every investor has the same information which should be priced into the shares if the market is efficient. An investor that does not use or conduct market research is just betting on the probability of a certain event happening. Buy buying the stock, that investor just feels certain events are more probably than the one shorting the shares.

However, if investors can gain an edge and improve the probability that the thesis will play out in their favor, they can improve their returns.  Market research can also identify if the thesis is not playing out, allowing the stockholder to exit the position before the broader market is aware and the stock has more than likely already declined.

The following is a scenario testable by market research, specifically a simple survey. Management at XYZ retailer is refurbishing its stores to improve foot traffic and change its image as a low cost, discount retailer.  It has just started the process and made slight progress in 1Q. The buy thesis for our investor is built around the ongoing success of these initiatives that are forecast to drive acceleration in sales and result in higher margins.

This management team provides an update with same store sales monthly but only margins and earnings in their quarterly report. But market research can provide insight to an investor on the same store sales numbers, but more importantly provide additional color on consumers’ response to the initiatives and other qualitative information.

There are a few ways to conduct the survey work. First, an investor could take a trip over to a newly renovated XYZ store if it’s nearby and talk to employees and other shoppers. However, this is problematic in that it’s a small sample size, the location could be far away, and traveling to many stores is costly and time consuming.

Second, an investor could call some of the stores and speak with store managers or employees. This is also time consuming and requires a certain skill set. By doing this, the investor uncovers that while the sales numbers are improving, shoppers are not happy with the higher end merchandise and pricing. Management at XYZ has continued discounting activity to retain customers and drive sales.

In this case, the same store sales comps are meeting Street expectations and driving the shares higher along the way, but the margins will more than likely fall short when earnings are released from the discounting activity. The Street is not broadly aware of this and the investor would exit the position ahead of the selloff that would likely follow the earnings report.

While market research is a clear benefit to test an investment thesis, such as in this scenario, many investors lack the time to do it. If you lack the time or experience, there are other avenues to pursue.  Research Optimus has the experience to build and conduct this research to give you the edge you needs as an investor and improve your returns.

– Research Optimus

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