The Best L/S Analysts Detect "Change"
Identifying inflections: Part 1
You might have heard many successful long/short investors talk about “detecting change” as a core part of their investment process. Granted, sometimes it’s just a bullshit marketing strategy to advertise their process when trying to raise a fund because it sounds grandioso. But it’s also a real tangible thing that creates alpha.
What it really means, in layman’s terms, is identifying a meaningful change in the business that changes the quarter relative to consensus and ideally changes the full year too. Or maybe I should say, that likely changes the quarter, because you never truly know how meaningful the inflection is until the company reports.
It’s actually crazy how many “experienced” analysts and PMs still fall into the trap of incorrectly identifying inflections. Usually because they don’t fundamentally understand what’s going on, or they just pay too much attention to the numbers without contextualizing or lack the systems to figure it out. That’s why you sometimes see really weird short-term stock reactions. It’s kind of funny watching it happen, and better investors take advantage of it. We will look at some recent stock examples and see how it all played out and what we can learn from it.
Ultimately, understanding this concept of inflections and “change” helps you generate ideas, even if you are completely lost, and explain stock moves, both in the short- and long-term.
Before we dive in, we’ve just released the full recording of our live guest speaker session with one of the most respected long/short PMs in the multi-manager industry. Watch it at the bottom of the page here.
First, we will briefly discuss inflections and what they actually mean, then walk through a recent example of how it played out. After that, we will look at idea generation from a “change” perspective and close with another recent example that shows why it might be dangerous to mis-identify inflections.