If you had $10,000 to invest ? Which stock ?

If you had $10,000 to invest—but you had to invest the money in a single
common stock—which company’s stock would you choose, and why?
While equity research analysts and equity sales professionals recommend specific stocks on a
daily basis, professionals in other areas of the bank—including corporate finance and
M&A—do not. Nonetheless, recruiters report that this question helps them evaluate
candidates on a number of criteria: the candidate’s general level of interest in the financial
markets, grasp of basic valuation concepts, and ability to speak intelligently on fundamental
investing principles. MBA associate candidates in particular will be expected to have a pretty
good answer for this question.
Bad Answers
Candidate 1: Probably Microsoft—they’re just completely dominant. Can you
seriously imagine every business in the country switching to a new operating
system? Bill Gates is the richest man in the world for a reason: huge barriers to
entry. The company has a complete monopoly on software that no one could
ever hope to replicate. They totally don’t seem to be hurt by all of the lawsuits
either, and in any case they have something like $100 billion in cash on the
books for a rainy day. I wish I had gotten in on that company from the
beginning.
It’s not necessarily the company you choose, but the rationale and detail that substantiate your
answer. In this case, Microsoft may be a perfectly legitimate investment choice, but the
candidate’s reasoning is almost wholly qualitative, and general and anecdotal at that. This
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candidate doesn’t know the first thing about how Microsoft is valued today, and this will be
painfully obvious to the interviewer.
Candidate 2: I would never invest $10,000 in a single common stock today.
Maybe someday, when I’m a managing director at this firm and I have $10,000
to just throw around, maybe then I would. The key to successful investing is
diversification! I would take the $10,000 and invest in a collection of mutual
funds—you can’t put all of your eggs in one basket. Right now, I don’t have the
time to do the research necessary to get comfortable with just one stock.
This candidate takes the approach of candor. She demonstrates that she understands a bit
about personal investing and isn’t a gambler. While diversification is an important investing
principle, this candidate has chosen the wrong opportunity to demonstrate her mastery of the
concept. Though you may certainly acknowledge that single-stock investing may not be your
preferred strategy, don’t evade the question that the interviewer asks. You can always lead with
this, but then answer the question.
Good Answer
Candidate: Well, I must admit that I don’t have a lot of practice choosing
single stocks to invest in. I’m still a novice investor, and so far, I’ve stuck with a
diversified portfolio of mutual funds that limit my risk exposure and provide a
decent return. But if I were fortunate enough to have $10,000 to invest in one
company, I would choose Target Corporation.
Here, the candidate takes a moment to acknowledge that single-stock investing is not an area
of expertise for the everyday investor. But by mentioning his own investing experience, he
demonstrates a basic level of interest in (and experience with) the fundamentals of investing
and the tradeoff between risk and return. He also offers an answer at the very beginning,
providing the interviewer an opportunity to shape the dialogue.
Interviewer: Fine. Why Target?
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Candidate: Well, you hear a lot about Wal-Mart, and it is a great company. But
as I see it, Target has largely the same business model but comes at a lower
valuation. But let’s start at the beginning: First thing’s first, I like the business. I
believe Wal-Mart and Target will continue to succeed because they offer the
customer a significant price savings on both everyday goods and smaller-ticket
consumer luxuries. I think specialty, niche retailers may be able to succeed selling
at a higher price point, but for the basics, I think the customer will continue to
gravitate toward the savings. Wal-Mart and Target have a sustainable competitive
advantage over smaller retailers and grocers through sheer scale; they’re able to
procure their inventory at a significant discount to competitors and can pass
much of this directly onto the consumer. This will translate into earnings growth
potential; I see the existing stores gaining market share and new stores opening
up across the country—and perhaps internationally, although I’m not that close to
their business model.
Interviewer: Let’s say that your assumptions about growth prospects are fairly
accurate. You mentioned valuation—how do you put a value on that growth?
Candidate: Well, first I would look at where Target trades today, relative to
Wal-Mart as well as the market as a whole. Target’s trading at 20x trailing
earnings today versus Wal-Mart at 24x. So on actual, “in the bag” earnings,
Target trades at more than a 15 percent discount to Wal-Mart today. But getting
back to growth, and looking forward, Target’s trading at 16x forward earnings,
versus Wal-Mart at 19x to 20x forward earnings—again, at a 20 percent
discount. Moreover, Target is actually projected to grow faster than Wal-Mart: 15
percent annual growth over the next 5 years, versus 14 percent for Wal-Mart
and 10 to 11 percent for the S&P 500. So when you asked about valuing
growth, you can look at the P/E multiples relative to the growth rate—the
PEG ratio—and see that Target’s trading at just over 1x its expected growth
rate, versus Wal-Mart at 1.4x and the S&P at 1.6x. So, for that money, you’re
getting growth at a good price.
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Interviewer: Warren Buffett has made a career of that. What else would you
consider before investing your money, other than the price/earnings multiple
and the growth rate, and the basic company strategy?
Candidate: Well, I would look at the company’s management.
Interviewer: What about management? As a small investor, how can you
accurately assess whether Target’s management is effective?
Candidate: Well, one measure would be the extent to which the company has
consistently hit its earnings estimates. I imagine Wall Street research analysts
base their earnings estimates on their discussions with top management at the
companies they cover; if management isn’t realistic about the sustainability of its
business plan or its future growth prospects, or if management doesn’t make
effective decisions, it’s not likely to meet its quarterly earnings. If there had been
a lot of change in the executive ranks recently, or if the company announced
that significant leadership changes were imminent, I might be concerned about
management’s ability to meet estimates. To be totally honest, I don’t know how
Target’s done relative to its earnings projections. If they’ve underperformed, I
guess that could be one reason they’re trading at a discount to Wal-Mart. If I
actually had $10,000 to invest, I’d probably want to look into that!
This candidate has clearly taken the time to develop a well-researched, well-articulated investment
thesis for a single stock. Our guess is that you may never have thought in any great
detail about PEG ratios, or where any one company traded versus the S&P 500. But as you
consider how to prepare for interviews, keep in mind that after all, this is Wall Street. Think
about how much better this candidate sounds (if a bit too bookish) than the loosey-goosey
would-be Microsoft buyer above. There are numerous free financial and investing websites out
there offering all the quantitative and qualitative information you’d need to develop a viewpoint
on any publicly traded stock. Regardless of your background, you can certainly learn
enough to be dangerous in an interview (and by dangerous, we mean armed with actual
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valuation metrics and numbers to back up your great stock picking idea). As a general rule,
when confronted with quantitative questions, try to ground your response in numbers and
analysis, and let the qualitative data add in color around the edges.

Graduating with your undergraduate or MBA program

Does this sound familiar?
You’re heading into the final stretch of your undergraduate or MBA program at a
top school, and you’re excited about the vast stretch of open road that lies ahead.
You’ve heard strange but wonderful stories about the world of investment
banking, and you’re intrigued by the prospect of checking out this extraordinary
universe for yourself. You’ve never been one to look before you leap, so you do a
little bit of research before you set off. You’ve read WetFeet’s Insider Guide to
Careers in Investment Banking, followed by Beat the Street: Investment Banking Interviews.
Armed with the sage advice in each of these guides, you’ve attended company
information sessions, trawled through banks’ websites, and spoken to friends who
currently hold the highly coveted banking roles that you’ve heard so much about.
You feel as though you genuinely understand what you’ll be doing on a daily basis,
the sacrifices the job demands, and the opportunities it affords.
You feel certain that you’re well on way to securing your spot. All of the recruiting
media that you’ve seen so far suggest that every investment bank is literally steps
away from world domination (e.g., “We are a global, multi-trillion dollar corporation
whose rapid growth and international presence are unmatched by any of our
competitors.”) and suggests that you, the candidate, are crucial to its very survival
(e.g., “We depend on people for our success—people like you—smart people with
ideas—ideas that can change the world.”). On-campus information sessions that
you’ve attended seem to confirm this belief; the recruiters representing each
company insist that they are simply looking for bright, motivated people. Buoyed
by recruiters’ encouraging words, you’re ecstatic when you’re invited to interview.
You arrive at the career center—well prepared to discuss how your experience in
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Interview Roadmap
pizza delivery relates to investment banking—and bang: You’re deluged with
questions about how you’d value a Manhattan skyscraper and what exactly you
think you’d be doing as an investment banker anyway. As you leave the meeting
with the image of the interviewer’s derisive sneer etched in your memory, you can
only wonder what happened to their insistence that they were only looking for
“bright, motivated people”?
Now, take a deep breath and relax! Chances are, none of this has even happened
to you yet, and even if you’re terrified that it might, WetFeet is here to help! The
good news is that although investment banking interviews have been known to
catch the unprepared candidate off guard, they’re perfectly manageable for people
like you (smart people—people who do their homework, people who want to do
fascinating work). For all the tall tales they’ve engendered, investment banking
interviews tend to be fairly predictable and relatively consistent from one interview
to the next. As one insider put it, “Two hundred thousand people have had this
job over the past 10 years. There’s no secret to what it takes to be successful or the
issues that interviews are likely to focus on.”
Beat the Street II is a companion volume to Beat the Street. It provides more detailed
explanations of the types of questions you’re likely to encounter, along with a list
of recruiters’ all-time favorite questions in each category. At WetFeet, we believe
that you’ll respond to tough questions more effectively if you know what your
interviewer is really getting at with each one. For each category of question, we’ve
compiled a list of specific skills and attributes that the interviewer will be seeking
in your response, as well as a brief review of why those characteristics are so
important for a successful investment banking career. Finally, we’ve prepared some
sample questions that will almost certainly arise in your interviews, along with
guidance on how you can answer them as effectively as our hypothetical
candidates.
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Interview Roadmap
For those of you who haven’t seen this volume’s predecessor guide, Beat the Street
provides an overview of the different areas within a securities firm that typically
hire external candidates each year: investment banking (corporate finance and
M&A), sales and trading, and equity research. It outlines the most effective ways to
conduct company-specific research, prepare your answers for the questions most
likely to arise, and anticipate differences among the first-round, second-round, and
final interviews. The guide includes a broad overview of the basic accounting and
finance principles most likely to creep up in your interviews. Finally, Beat the Street
offers examples of the most frequently posed interview questions, along with
worksheets designed to help you design effective, personalized responses.
A word about how to use this guide: As we discuss later, investment banking
interviews vary significantly depending on the background of the candidate and the
often capricious whims of the particular interviewer. Although we’ll give you the
tools you’ll need to anticipate the questions most likely to arise and we’ll advise you
on how best to formulate an effective answer, only you can craft a response that
truly highlights the particular strengths and experiences that you bring to the table.
As such, don’t get too distracted by the specific work or extracurricular experience
described by the candidates we’ve profiled (and under no circumstances should you
panic if you don’t offer the same range of experiences that they do). More important
than these candidates’ qualifications is their ability to navigate potentially tricky
questions by framing their experiences effectively. And finally, keep in mind that no
written guide can capture the intangibles like enthusiasm, conviction, confidence,
poise, and presence—all of the factors that often distinguish an extraordinary
response from a mediocre one.
With that in mind, get behind the wheel, fasten your seatbelt, and start your engine:
You’re ready to hit the road.