Archive for October, 2010

The balance sheet & all the rest

October 30, 2010

Legendary value investor Marty Whitman gives a good interview on investing in the October 30 Barron’s. It’s a fun read, if you like to gather wisdom from folks who have been around Wall Street for more than a few bull – and bear – markets.

The 86-year-old founder (and still chairman) of Third Avenue Management talks about value investing, the need for transparency in markets, short sellers, lessons from the latest financial crisis, and academic theories (he doesn’t much like them).

Investor relations people may benefit from Whitman’s No.1 lesson from the 2008 financial meltdown: the importance of the balance sheet, which IR messaging often skimps on or ignores. And his No. 2 lesson: the importance of management in protecting investors from getting clobbered by something like the ’08 crisis.

Both should be themes for investor communications, especially now.

Whitman’s advice to other investors also has applications to IR:

You have to be gestaltist. Every accounting number is important, and is derived from other accounting numbers. So you have to understand the whole accounting cycle. If I want to estimate earnings, and I only have one tool, I would pick the current balance sheet.

As a value investor, what you are interested in is whether the company is creating wealth. There are four ways to create wealth; it is not just cash flow. They are [bullets added]:

  • One, having cash flow from operations available to security holders. A company can use that cash to expand its asset base, reduce liabilities or distribute the money to shareholders, either by paying dividends or buying back stock.
  • Two, and probably much more important, is having earnings, which we define as creating wealth while consuming cash. Remember, though, that earnings for most companies do not have a long-term value unless the company also has access to capital markets because if it doesn’t, sooner or later, it will to run out of cash.
  • The third—and very, very important—value-creation method is resource conversion. … Mergers and acquisitions, changes in control, massive recapitalizations, spinoffs, etc.
  • The fourth wealth-creation method … is having extremely attractive access to capital markets.

Food for thought as we develop messages for annual reports, presentations and financial releases. Many companies give a nod to “creating shareholder value” but fail to spell out the strategy for doing so.

Investors in most companies would benefit from management doing a better job of showing shareholders how business results – and changes in business strategy – work through the income statement, balance sheet and cash flows. Basic IR.

© 2010 Johnson Strategic Communications Inc.

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REIT disclosures help broader market

October 25, 2010

Most investor relations people are champions of disclosure – believers in the value of transparency for shareholders, as well as investors who might buy our stocks.

Now an article on the 50th anniversary of Real Estate Investment Trusts in National Real Estate Investor says the entire market – private and public – has gained from the emergence of publicly traded REITs and reliable financial data:

Thanks to Wall Street and a wave of IPOs [in the 1990s], modern REITs have not only provided liquidity to the commercial real estate industry, they have also upped the level of sophistication of financial reporting.

Ralph Block, a REIT investor and author of The Essential REIT, says the data in public disclosure makes a big difference from real estate investing years ago:

There has been an absolute revolution in disclosure and that’s true for most public companies. There is a lot more information available about not only the company, but also the properties.

Adam Markman, managing director of the independent real estate research firm Green Street Advisors, adds:

We think that the amount of information you can pull out of these publicly traded companies is helpful for the whole industry.

The benefit of “comps,” or comparative data on asset values and returns, probably carries over in many industries beyond real estate. Private equity investors and investment bankers often look to SEC filings of the public companies in a sector, as well as private information, to evaluate deals or valuations of companies.

The real estate industry also benefits from an education-minded trade group, the National Association of Real Estate Investment Trusts (NAREIT), that collects a wealth of data on real estate assets and returns – and puts the numbers out there on its website for investors (public or private) to track and use. Many trade groups keep data they gather close to the vest – to the detriment of their industries.

Of course, REITs haven’t had an easy go of it during the recent global meltdown-collapse-crisis-whatever-alarmist-name-you-want-to-call-it. For a typical REIT investor, these stocks are all about dividends – and generating the earnings or funds from operations to keep those dividends flowing is a challenge these days.

Referring to the three dividend cuts by mall owner CBL & Associates, REIT analyst Christopher Lucas of Robert W. Baird & Co., says:

That was a significant hit to the individual investor’s trust in the vehicle and in the operations, and it’s going to take some time to earn that trust back. … Now they have to rebuild the trust that investors placed in them to manage their balance sheet and their dividend much more consistently.

Managing performance to rebuild trust, of course, is what many companies in all industries are seeking to do as the economy bounces along in what seems to be an extended trough. Robust disclosure of results will aid in winning back that trust.

© 2010 Johnson Strategic Communications Inc.

New IR tactic? Michelle Obama …

October 22, 2010

Well, there it is, in the pages of the Harvard Business Review for November 2010: Finance prof David Yermack of NYU reports in “Vision Statement: How This First Lady Moves Markets” that Michelle Obama’s choice of outfits generates “abnormal returns” for stocks of publicly traded companies behind the fashion brands.

Who’d have thought the First Lady might become a tool for investor relations?

Yermack reports on 189 public appearances by Obama – FLOTUS, not POTUS – in which she wore 245 items of apparel with recognizable brands of 29 public companies. For those 29 companies, her wardrobe choices generated a total value of $2.7 billion, Yermack says. You read it right: $2.7 billion, with a B.

When the First Lady jetted off on a one-week tour of Europe in March-April 2009, for example, her fashion choices were much in the media – and Yermack calculates the stocks of fashion and retail companies whose clothes she wore rose an average of 16.3%, beating the S&P 500 gain of 6.1%. For 18 major appearances, the cumulative abnormal return averaged 2.3%, he says.

A hedge fund could build a trading strategy on this First Lady Fashion Anomaly. The NYU Finance prof observes:

The stock price gains persist days after the outfit is worn and in some cases even trend slightly higher three weeks later. Some companies that sell clothes that Obama frequently wears, such as Saks, have realized long-term gains. Her husband’s approval rating appears to have no effect on the returns.

This is about impact on revenue (and perhaps investors’ perceptions), not some kind of fashion voodoo like the stock market hemline indicator. And her impact exceeds that of other celebrities or models, Yermack says. He explains it this way:

The unparalleled robustness of the Michelle Obama effect results from the confluence of three factors: her personal interest in fashion, recognized by consumers as authentic; her position as First Lady and the intangible value it confers; and the power of the social internet and e-commerce. Descriptions and images of what she’s wearing spread across the social internet in near-real time, and consumers can buy these fashions almost instantly online.

So figure out how to get your product on the First Lady, preferably for a high-profile event like a state dinner or tour of world capitals. IR needs to be creative!

© 2010 Johnson Strategic Communications Inc.

Funny thing about …

October 1, 2010

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.

– Mark Twain, American humorist, 1894

At a NIRI meeting last night in Kansas City, I commiserated with a friend over dinner about the state of the economy. It’s like a patient drifting in and out of consciousness in the recovery room – we don’t know whether the surgery was a success until the patient wakes up, smiles and moves a bit. Meanwhile, the job market is lousy. Consumers are cautious. The Fed frets. Companies worry. Waves of regulation and additional costs are looming. And the Nov. 2 election? Bah.

This morning brought a new month and fresh outlook. Hey, let’s have some fun in October – look beyond the macro anxieties – and do some good in investor relations this fall. And the market will do what it will do.

© 2010 Johnson Strategic Communications Inc.