Methodology

At Unit Economics, we bring a unique proposition to independent research

 

At Unit Economics, We bring a unique proposition to independent research. We combine a
fundamentally-oriented ‘Unit Economics’ approach to modeling and forecasting company
financials with a ‘pay or performance’ business model. The result adds weight to share
prices and investor sentiment in our decision-making process.

Identifying macro and thematic trends is crucial to formulating our investment ideas. We
publish research reports on our major themes and trends and then we set out to find stock
ideas, both long and short, that bring alpha to our thesis.


We generate our stock ideas from stock screens, industry and corporate contacts and
through our macro/thematic news. Once we identify potential investment opportunities,
we pore over prior conference calls, SEC filings and past earnings releases to form an
understanding of the business history and ‘Unit Economics’ of the company. We typically
contact company management for CFO-level discussions of cost functions, capacity
utilization and business outlook, further refining our thesis. Only at this point do we talk
to contacts on the street and look for oversights and holes in our thesis. This diligence
and deliberation – resisting the impulse to turn too hastily to street analysts- produces
fresh investment conclusions untainted by conformity. Finally, we develop an earnings
model and test its ability to predict past earnings releases, before looking forward to predict
future earnings. Unlike most firms, we publish the accuracy of the earnings model in every
research report for each company that we follow.


Most research firms stop here. But we understand that successfully predicting the
earnings of a company does not always make for a successful investment. We take things
one step further. We incorporate street expectations and investor sentiment, gauged
through short interest, technical analysis, fund manager surveys, options activity and open
interest in sector funds or ETFs to determine the suitability of the stock as an investment.


We then examine the risk/reward of our investment thesis and determine what other
variables may drive the shares, such as consumer sentiment, GDP or energy prices.
Lastly, we look at the overall portfolio effect of adding the security to one of our portfolios.


Having passed all of these hurdles, the thesis is monitored and refined as new information
becomes available and the size of the position is scaled to reflect increasing/decreasing
confidence, risk/reward and ‘arbitrage’ between our view and what we believe is priced into
the stock.