Sell-side and buy-side investment research methods and analyst roles

Real Options Valuation

Market investors often carry out their research in a sell side or buy side method. Sell side carry out their investment research to enable them satisfy buy side customers. They carry out this research to generate business or reach the goal of generating transactions. The buy side follows the prospective of banking customers as away of attracting new customers and a service to past customers. Sell side firms sell IPO's and services to the buy side companies.

Buy side and sell side

Buy side reports produced in house consumption are used by colleagues to the analyst. These colleagues can be corporate development executives and development and portfolio managers. Sell-side reports done by firm analysts are vastly distributed than the buy side reports. Sell side reports should be clear because of their wide distribution, while by side reports should be simple and brief because company's management uses them. In the sell-side, the analyst has a twofold problem; the analyst has to reach a convincing decision by investigating an investment in a disciplined way and reaching a required wise decision. Secondly he must report in a tone and language convincing to others. This means that the analyst has to have contingent writing ability. A skilled analyst will simplify technical language, putting down key points enabling them to communicate effectively to the readers. A cogent analysis will start by a sort description of a company and ends with the recommendations.

The sell side is about communicating valuation analysis results through different methods. One can print the communication, pass it through emails, faxes or pass it verbally. On the buy side, one is paid to outperform the index without talking to anyone. As a sell side analyst, Martin works for brokers and dealers who sell the research to their buy side clients. Buy side has a form of investment while sell side clients use different types of money management disciplines.

While working for CSFB as a sell side analyst Martin was expected to satisfy three groups; the buy firms she advised, internal CSFB constituents and the companies she covered. Martin could be asked for expert advice, and her recommendations supposed to be reliable, this is because clients would consider participating in the deal in regards to martin's valuation about pricing and overall business. She recommended depending on the target and earning estimates of certain stocks.

On the buy side, Martin provided her recommendations to her manager, companies she worked for and her colleagues. Sell side conducts analysis, which is deeper, compared to the buy side. Structurers are involved in both the sell side and the buy side. In the sell side, trading and selling require structuring specialist to provide expertise. Trading structures provide information on how the structure can be changed and valuation services. Structurer security on the buy side exposes them to the market, which they cannot access and help them in opportunity identification for more benefit. Buy side create risks which the sell side along with Structurers work to mitigate.

Logic

The logic used is appropriate because stealth tier provided 102 mHz unused capacity which according to her estimation was not valueless. DCF valuation was not satisfactory in valuing the unused channels. Martin thought the stealth tier was a real option to cable industries such as COX because; they could light up the stealth tier as a new or immature service.Real options valuation was the ideal valuation of stealth tier due to the uncertainty in the market. Real options valuations give managers a right to pursue investment projects without obligations to pursue the project. This makes this logic appropriate for this situation so I agree with this logic.

In Black-Scholes model; Martin Laura considered the European style optionto evaluate the valuation of stealth tier.She used the Black-Scholes model in equity options andpricing to value the call option.The choice to use the megahertz systems embedded a call option for future, unidentified opportunities making it appropriate. The financial theory as shown by Black Scholes model gives insights about businesses and shows the strategic investments per home passed. So this is agood approach.

Motivation

Martin Laura was motivated by the change in technology, emerging industrial structures and evolution in her industry, which made the traditional methods less effective. The upgrade of cable infrastructure has led to the creation of unused brand width capacity which could be used elsewhere. New markets are emerging this brings a lot of competition and uncertainty hence the real option is a strong strategic analysis. She was also inspired by the fact that stealth tier was being ignored by the market to the extent of not incorporating it into the valuation.

Where real options should be used

Real valuations options are used in emerging markets. Emerging business is well valued using real options analysis because evolution of landscape of businesses which demands evolved tools of analysis. The approach is advantageous because it has an analytical flexibility which most of the models and frameworks lack. The flexibility of this analysis gives potential to value investment, and it also captures investment opportunities.

Advantages and comparison

Those who use the CDF are more convincing to their colleague and the readers or interested parties, as it gives them a substantial intuitive appeal. Real options valuation is better than the other models because of the flexibility. Because of the wide range of questions, it asks it makes it better than EBIDTA which asks fewer questions hence reduce the accountability of balance sheets. Real options can be used to compliment DCF analysis. DCF treats depreciation and capital spending as crucial in valuing; hence enable growth of the company.

Conclusion

Every asset has a value associated with them. For successful investment of different assets, one has to know the value and the source of value. Real option analysis helps in asking better questions about companies, it also captures investment opportunities.