Seeking Alpha Author Experience #44: What We Mean By 'Quantification'

by: SA Author Experience

By SA PRO Managing Editor Daniel Shvartsman

We discussed "compelling," one of our more subjective Top Idea criteria, last week. I’ll work through our other criteria over the next four installments:

  • Quantification (this installment)
  • Asymmetric Risk-Reward
  • Market Mispricing
  • Catalysts

Quantification is the most general of these criteria, and I think it has the most room for different approaches. As with the rest of Seeking Alpha, for PRO we’re not looking for one specific approach. Even with our criteria, we judge each article based on quality of content, not specific form or approach issues. We get a lot of questions about what the right word count is, or should I write like that author, or does the article need to have a DCF, or similar, and there’s no good answer (except no, it doesn’t need a DCF).

For quantification, we explicitly do not mean that you need to provide detailed models or a DCF. If that’s how you approach your analysis, that’s fine, share what you think you need to share to make the case. But models in and of themselves are not that meaningful - many investors can make a model that says AAPL is worth $50, and then make the same model to say AAPL is worth $100. I read a phrase somewhere that a DCF is like taking a deep sea submarine through the ocean, while P/E is like riding on a cruise liner above the same water. Both approaches will get you there, and while there might be times where the deep sea dive is necessary, it’s not an all the time standard.

What we do mean by quantification is essentially two things:

  1. That you don’t just tell us about the company story, you also address that there is an underlying stock, that it has a price, and that price does matter.
  2. That your thesis appear to be meaningful to the underlying stock. A company may have the next great penny minter, but if that will only lead to 1% revenue growth per year, that’s probably not going to have a major impact on its valuation.

How you address price and how you connect the thesis to the stock are up to you. We review to make sure you are using clearly explained methods and, normally, conventional ones. We’ll also spot-check the math where needed. But the degree to which you work on the numbers is a function of your article and your style.

Here are two top ideas as an example:

Brendan Rose is both a compelling stock analyst/investor and an entertaining writer. On his recent top idea for Simulations Plus, he focused much more on the qualitative story: what Simulations Plus is doing and why its business will be successful in coming years. There’s some quantification here:

But the article spends more time analyzing the business:

The conclusion summarizes Brendan’s approach in this article well:

There’s an acknowledgement of price, analysis of the underlying business earnings, and some valuation metrics, but the quantification was not exhaustive by any means. I don’t think Brendan’s article, however, would have benefited from him putting a long and detailed excel model together of SLP’s prospects - it wasn’t the focus of the piece, and it doesn’t make the story more convincing. There was still a clear thesis for why SLP would continue to grow and earn a high multiple, and Brendan did enough to translate that to actionability.

On the flipside, another recent top idea by Tim Insko shows a very quantitative approach. Tim values companies more rigorously than most analysts I’ve read. Just to show a representative snapshot:

Tim builds a ground-up model to analyze DAR’s prospects and valuation. Here, he goes into depth on the WACC (weighted average cost of capital). This is good, textbook financial analysis. It wouldn’t be enough on its own, however, without tying the quantification back to the story.

Which Tim does nicely:

Tim’s article is very rigorous quantitatively. Brendan’s focuses more on the qualitative edge that SLP has in its industry. Both provide compelling analysis (along the lines of what we discussed last time), and both give investors a sense that, yes, there’s serious upside potential here. That’s what we’re looking for with the quantification aspect of Top ideas.

Which will segue naturally into the next installment: how your idea protects its downside.

Up next on Tuesday, May 3 in installment #44: When Should I Add A Primary Ticker? with SA VP of Content George Moriarty

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