shorting stocks: my research process & 7 rules i follow
i short quite a lot at my current shop. i'd split my shorting into 4 buckets:


low quality companies that are misunderstood:
these are typically misunderstood because some risk factor in the business model isn't fully appreciated by the market, or because analysts get too optimistic and project out constant (or accelerating!) growth and/or expanding margins. example of this is retailers that are dependent on store growth who end up cannibalising sales which isn't in consensus projections. sometimes primary research can almost be too easy (e.g.
shorting has been pretty horrible this year imo. so firstly you have the broad pro-equity factors you mentioned e.g. rotation into etfs, which makes it tough to be short anything in the first place. then you have other factors that have made stock-picking increasingly difficult on the short side, such as the vast quantities of pe dry powder on the sidelines that have bought out some heavily shorted stocks this year.
the sector exposure stuff has been bad too. e.g. consumer staples which has been a fundamental short for a while (slowing growth, saturation in ems, peak margins).
Short interest is the total number of shares of a particular stock that have been sold short by investors but have not yet been covered or closed out. This can be expressed as a number or as a percentage.   

  

When expressed as a percentage short interest is the number of shorted shares divided by the number of shares outstanding. For example, a stock with 1.5 million shares sold short and 10 million shares outstanding has a short interest of 15% (1.5 million/10 million = 15%).   

  

Most stock exchanges track the short interest in each stock and issue reports at month's end. These reports are great because, by showing what short sellers are doing, they allow investors to gauge overall market sentiment surrounding a particular stock. Or alternatively most exchanges provide an online tool to calculate short interest for a particular security. For example check out the Nasdaq's short interest calculator; it's very easy to use. hi,

lots of great explanations below, but i fear they might be difficult to truly conceptualize. 

let's start with a pie!

if there's a pie in front of us, that is the market. we'll call it 100 units of pie

we cut the pie in half - one piece (50 pie units) for you, and one piece (50 pie units) for me

scenario 1: we do nothing, we both have 50% market share.

scenario 2: i eat half my pie. my pie slice is now 25 units, yours is still 50 units. as a result, you have 67% of the market share and i have 33%. my "revenues" have fallen and my market share has fallen. your revenues haven't changed but you've gained market share

scenario 3: not only do i eat half my pie, but you also eat 20% of yours. still, i ate more, so even though your "revenues" are down, you've still gained market share.

scenario 4: we both get given more pie (yay). but, i get a whole other 50 units, and you only get 5 more. your "revenues" are up, but you've still lost market share!

i've created the below image for you to visualize this better (click on it to blow it up)...hope this helps! hi,

there is no one-fits-it-all framework that you can use. viktor cheng approach is good but oversimplified.  you should be flexible enough to come up with your own approaches and it comes with practice. 

i recommend the following approach:

1) start with "case in point" book - you can download this book for free everywhere. it's not the best guide on how you should approach the cases, however, it will give you the basic understanding.

2) start practicing cases with partners here or find them locally. !!! find experienced partners or coaches who can provide a good feedback!!!

3) purchase and read viktor cheng book (amazon kindle store) and listen to loms (his website). i recommend to reread the book and listen to loms every 15 cases. every time, having more experience, you’ll be finding something new.

4) practice fast math


 learn how to multiply double digit numbers (https://www.youtube.com/watch?v=6ndkkpzyjho)
 learn the division table up to 1/11 (i.e. 5/6 = 83.3)
 learn how to work with zeros (hint: 4000000 = 4*10ˆ6)
 use math tools (mimir math for ios), math tool on viktor cheng website to practice


5) below you can find a list of the most common case types and some high-level recommendations on structuring:


 market sizing - structuring from the supply or demand side. structuring using a formula or using an issue tree
 profitability - basic profitability framework. remember about different revenue streams and product mix
 market context cases (market entry, new product, acquisition, etc). always start with the big picture "market". finish with something specific to the case (e.g. how to enter?"). structure it as if you are defining the work streams for the real project.
 operational math problem (e.g. should we increase the speed of an elevator or just buy a second one? how should we reduce the queues? etc.) - structuring as a process / value chain, with inflows, operations, and outflows
 cost cutting - i provided the recommendations on structuring it here: https://www.preplounge.com/en/consulting-forum/operations-cases-mck-1105#a2134
 valuation - purely financial structure with cash flows, growth rate, wacc / hurdle rate, etc.
 synergies - revenue synergies (price, qty, mix) and cost synergies (value chain).
 social / economics cases (e.g. how to improve the quality of life in the city? how to increase the revenues of the museum?) - huge variability. practice 3-5 social cases before the interview


6) also, i would try to focus on the most common industries in the following priority(sorted by probability of getting a case): 1-retail and cpg; 2-airlines; 3-telecom; 4-banking; 5-natural resources; 6-tech

7) ! important: don't forget about the fit interview part. crafting you stories and backups stories will require a couple of weeks!

ps

here is a good list of articles regarding the different parts of the case:

1) start with clarifying questions:

https://www.preplounge.com/en/consulting-forum/clarifying-questions-1786#a3956

2) communicating while structuring. here is a long post by me on how to communicate the structure during the case study:

https://www.preplounge.com/en/consulting-forum/how-to-communicate-its-structure-for-the-case-study-1313#a2806

3) using hypothesis. i made a post about hypothesis here:

https://www.preplounge.com/en/consulting-forum/how-to-state-a-hypothesis-and-match-to-the-structure-1156#a2268

4) communicating while making calculations: 


 always tell the interviewer your approach
 check with the interviewer that your approach is correct
 come to the interviewer with some preliminary answers
 check your assumptions with the interviewer


5) communicating during the analysis of graphs / tables


 take a minute to look at the graph. read the graph title. look at the graph type and define the type (pie chart, line chart, etc). look at the legend (ask for clarifying questions if necessary). identify whats going on on the graph. look for: trends, % structures. look for unusual things - correlations, outliers,
 make 3-4 conclusions from the graph. think out loud on potential hypothesis on what could be the root cause / what are the consequences
 prioritize the most important for your current analysis and move forward with the case


6) communicating while having questions on creativity


 ask an interview for a minute to think
 think of several buckets of ideas (e.g. organic growth / non-organic growth / differentiation). remember to think as big as possible
 narrow down to each bucket and generate as many ideas as possible
 present the structure (buckets) and then your ideas


7) communicating your conclusion. you can find a good example i've posted here:

https://www.preplounge.com/en/consulting-forum/how-much-answer-first-should-the-conclusion-be-1231#a2493

8) communicating your fit stories

use the top-down approach while communicating your stories. "the pyramid principle" is the must-read by ex mckinsey on this topic.

i recommend using the star framework:


 in situation, you should briefly provide the context, usually in 1 or 2 sentences
 task usually includes 2 or 3 sentences describing the problem and your objective.
 then you provide a list of specific actions you took to achieve the goal. it should take 1 or 2 sentences per action (usually 3-4 actions). note that the interviewer can stop you any minute and ask for more details.
 the results part should have 1 or 2 sentences describing the outcomes. this part is finalizing your story - make sure it can impress the interviewer and stay in the memory.


best! an early stage start-up is still at the nascent stage. this makes for a very creative and flexible learning environment. they prioritise quick learning and determination. early stage start-ups provide good chances for adding to the skill set. you learn quick decision making and have additional responsibilities. an early stage start-up hinges on multitasking and passion since the pay can be uncertain. start-up is more growth oriented as compared to experienced corporations. it is a good place to develop and acquire multiple skills. One difficulty is that it's far from clear what the ideal dropout rate should be. Probably not zero, for two reasons:

 1. Even the best students sometimes find that their interests change over time, in ways nobody could have predicted. Dropping out may become a quite sensible choice, in which case it's harmful for the university to discourage it.
2. It's reasonable for a university to give someone a chance even if it's not certain that they will succeed. The only way to get a really low drop-out rate is to admit just the applicants that are obviously destined for success. The top few schools can get away with this, but if everyone tried it, then many talented candidates would be shut out from graduate school.

 So some attrition is OK, and some is bad but may be a necessary consequence of policies that are on the whole good. The question then becomes how you distinguish these kinds from needless and damaging attrition, and then how you minimize that kind.

 Advisors play a key role here, because some are much better than others at being supportive or motivational. However, at least in mathematics, most advisors don't supervise very many students, so the numbers often aren't large enough to see patterns clearly.

 I'm sure people have studied this problem, and perhaps identified best practices for addressing it. However, in my experience any studies or solutions are not especially influential (at least in the few math departments I've been in). Most discussions are at the stage of trying to figure out whether there is a real problem and if so why, rather than what to do about it. Hi


In **consulting interviews** you may have **two types of M&A cases:**


1. Commercial due-diligence of the target company
2. Synergies calculation of two merging companies


There are **two ways to identify the exact type of a case:**


* The interviewer will tell you
* In the beginning, while asking clarifying questions you ask what is the objective and if we have any other company in the portfolio that can have potential synergies


**1. For commercial DD** you can use the following structure:


**Market**


* Size
* Growth rates
* Profitability
* Segments
* Distribution channels


**Competition**


* Market shares of competitors and their segments (see the next point)
* Concentration / fragmentation (Fragmented market with lots of small players is less mature and easier to enter from a scratch. Concentrated market is hard to enter but has potential acquisition targets)
* Unit economics of the players (Margins, relative cost position)
* Key capabilities of the players (e.g. suppliers, assets, IP, etc)


**Company** 


* Unit economics (Margins, costs) in current or target markets
* Brand
* Product mix
* Key capabilities


**Feasibility of exit**:


* Exit multiples
* Exit time
* Existence of buyers


**2. For Synergies Calculation** you can use the following structure:


1. **Revenue synergies** - here you calculate the synergies in price and quantity (depending on the case it may be new geographies, new products, new distribution channels, bigger share on shelves crosselling opportunities, etc.)
2. **Cost synergies** - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
3. **Risks** - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
4. **Total synergies potential** in $, adjusted by risk (probability of failure)


**In private equity interviews,** the cases will be much more detailed in financial part. Depending on the company you'll need to:


* Find the relevant information in P&L and Balance sheet
* Do the simplified valuation using NPV: calculate cash flows and make assumptions about growth rate and discount rate
* Do the valuation using comps - you'll have to explain which comps you will use and why


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