What’s wrong with this company?

A contrarian approach to messaging for investor relations is to ask yourself, “What’s wrong with this company?” Then, in IR reports and presentations, address the weak points of your business – what causes investors to turn up their noses – along with your solutions.

This offbeat idea was prompted by an interview with Anne Gudefin, a stock picker involved in Pimco’s growing presence in the equity markets, in Fortune‘s May 23, 2011, issue. She is a value investor, and like many I’ve talked to Gudefin is looking for stocks that are beaten down – but have upside potential.

“How do you decide a stock is cheap?” Fortune asks. Gudefin says she likes good business models, high barriers to entry and free cash flow. Then she adds:

I also want to see things that aren’t operating perfectly at the moment, so there’s a margin for improvement. I look for there to be a number of catalysts for value to be unlocked. … During the second quarter of last year we bought BP. Because everyone was so negative about it, we were able to buy very good assets at a very cheap price.

Like many on the buy side, Gudefin is looking for companies with a “catalyst for change.” If something’s wrong, the value-oriented investor sees upside potential.

Sure, IR usually focuses on a company’s strengths – great products, competitive advantages, 24-carat gold balance sheet, smart management. We love bar graphs that show a powerful uptrend. We recite accomplishments of each quarter or year.

Maybe IR should look for vulnerabilities. Good investors will find them, anyway. How about bringing issues out in the open? Of course, we won’t title our roadshow presentation “3 Reasons Not to Invest.” But let’s discuss that catalyst for change:

  • Spell out the challenge. Describe the problem objectively, as investors and analysts are likely to see it. Show a capacity for humility, even self-criticism.
  • Define a solution. Emphasize your strategy for solving the problem. The more tangible the actions you lay out, the more you overcome investors’ doubt.
  • Track your progress. Check off actions as you take them. Quantify the progress. Investors will be convinced after a quarter or two of positive results.

Being transparent about problems has drawbacks, of course. Some challenges are tough, they may stretch over several quarters, and you may report a disappointing lack of progress at some stage – or even have to change the strategy.

Think of the really good questions investors sometimes ask. Why are sales flat in your XYZ division? Your gross margin is underperforming these peer companies – how are you addressing that? What business issue keeps you awake at night?

What’s important is that you recognize what is holding back your company’s value and explain to investors that you are implementing a plan to solve that problem. The goal is improving performance that unlock the value for shareholders.

What do you think? Any tips on IR reporting on business problems?

© 2011 Johnson Strategic Communications Inc.

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