Morgan Stanley

TST Equities Systems – Morgan Stanley

The publishing team at Morgan Stanley used TST to publish a series of TST-based research reports in 2005-6.  The senior analyst, Douglas Arthur, used 5 different TST applications at Morgan Stanley, a hedge fund, and Evercore Partners.  The value of the Morgan Stanley reports are that the first report contains a 26-page description of TST’s value proposition and benefits. The subsequent reports illustrate how TST-based reports are both shorter and me comprehensive than traditional QT model-based reports.

               To read first report, click: First Report     To read last report, clickLast Report

The first Morgan Stanley report headlined below describes the TST value proposition, methodology and benefits.

First Morgan Stanley Report – 2005-6 Version 1

Morgan Stanley Snapshot

THINKSheet™ Model Framework

The model structure below demonstrates the importance the Morgan Stanley senior analyst attached to the qualitative factors of catalysts, risks (expectations, execution & acquisitions) and x factors. He weighted his 25 QT metrics 60% and his QL metrics 40%. He subsequently realized that it was more productive to prioritize the metrics he considered most important so he reduced the number of QT metrics from 25 to 6. You can see the 2015 version of his model below in the section entitled “TST Enabled the Morgan Stanley Analyst to Improve his Thought Process”.

MorganStanleyTSTModelStructure2

Morgan Stanley Quotes

The analyst described the THINKSheet methodology, value proposition and benefits in the above report, which is available below. The quotes below are extracts from that report.

“Truer To Life” Approach

By merging critical issues analysis with a traditional quantitative approach, we believe we are creating a robust analytical approach and one “truer to life” than that provided by a quant-based methodology alone.

Apples To Apples Comparisons

The model (employing ThinkSheet™ software and applications) relies on a number of algorithms that quantify the value of our thought process per stock and then re-computes the inputs to provide comparability.

Therefore, our thoughts on the strategy or leadership or market risks facing each individual company are comparable in measurement to the stock’s underlying P/E or earnings growth assessment.

In turn, by creating a truly apples-to- apples comparable measurement system for our entire universe, we believe, we are better able to compare seemingly different companies such as Moody’s, New York Times, or R.R. Donnelley on the same basis.

Complete Answer

The aim of the exercise, as with our prior ranking system, is to identify the cheapest stocks with the best fundamentals that have a near-term, positive catalyst, low risk, and beneficial X-factors.

QL Enhancement

In re-introducing and, we believe, enhancing our stock ranking methodology, eleven valuation inputs and fourteen financial measures (all individually ranked and scaled) represent only 60% of the weighted score for each stock.

The balance, or 40% of the weighted score, is the quantification of critical/subjective issues or catalysts, risks, and — what we call — the “X-factor” (or unique attribute per stock).

QL+QT Efficiency

We are attempting to supplement largely efficiently priced-in valuation and financial measures for each stock by quantifying our major thoughts / concerns / expectations for each company/stock in a systematic method.

Shorter, More Complete Reports

The next six Morgan Stanley reports illustrate how TST reports are shorter, more complete and easier-to-understand than traditional research reports – making the exchange of ideas with buy-side clients more productive.

Last THINKSheet Report

MorganStanleyLastReportCover

Click on cover page to enlarge

The report at left includes 2 introductory text pages and 10 TST models. The communications power of the TST models enabled the Morgan Stanley team to compare their long term ratings and short-term rankings (Exhibit 4, page 4); synthesize the most important elements of their ranking process on one page (Exhibit 5, page 5); break down the process into sub-models (Critical Issues – Exhibit 6; Valuation – Exhibit 7; and Financials – Exhibit 8); and supplement the models with snippets of text for each stock (Exhibit 10, pages 10-12).

To read last report, click: Last Report

To read first report, click: First Report

Ranking Example & Catalyst Definition

Catalysts Definition

The investment world, the buy side and sell side alike, are in constant search for the burning “catalyst” for any particular stock story. Potential catalysts can be good, bad, or non-existent depending on the time-period.  Our model weights the catalyst factor heavily or 17.5% of the entire weighted sum score. We score the catalyst factor employing seven different scores between 100% (the most positive) and “0”.

First Morgan Stanley Report, page 4

From the catalysts selected by the Morgan Stanley team for each stock, communicated and quantified using one of our proprietary Professional Language Similarity Functions, ThinkSHEET assigned a symbol for each catalyst and color-coded them to highlight their impact on the overall results.

MorganStanleyCatalysts

You can see at a glance that the Ad turn at Times/Globe +++ catalyst for New York Times had the most positive impact, while Vocational school exposure for Washington Post the most negative impact.

Drivers Histories

You can create comprehensive histories of your stock analyses and their performance. The model below shows the change in the Moody’s analysis from report to report.

Moody’s History

MoodysHistoryXXX

You can see at a glance why Moody’s ranking moved from 5th to 15th and then back to 5th over the model history. This movement was in spite of the fact that Moody’s Financials (highest weighted metric at 35%) remained “Outstanding” throughout the period. Its ranking fell from 5th to 15th in 1 month primarily due to the deterioration in the X Factor – a key factor at 17.5% weight.  The team’s X Factor judgment changed from “International Growth structured finance +++” (max positive) to “Int’l growth / Spitzer subpoena -” (slight negative), reducing the Overall Score by 52% from 51% to -1%. Moody’s then rose back to 5th with a 56% score primarily due to the X factor moving up to neutral from slightly negative.

Improving Analyst’s Thought Process & Model

(2015 Model Version)

Douglas Arthur, the lead analyst at Morgan Stanley who authored the above report, improved both his thought process and his TST model over time. His 2015 model changed:

  • QT metrics from 25 to 6
  • Catalysts to Short Term Catalysts
  • X Factors to Black Swans
  • QT and QL weights from 60% & 40%, respectively, to 40% & 60%.

He also changed the 3 Risks from Expectations, Execution & Acquisitions to Quarterly Momentum, Demand and Industry Dynamics.  The updated model structure is below:

EvercoreTSTModelStructure

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