Posts Tagged ‘Value investing’

Do we focus on the long term?

March 17, 2014

We often hear CEOs complain about the short-termism of Wall Street, but a commentary by value investor Francois Ticart in this week’s Barron’s questions whether most companies really focus on long-term value. Let’s include investor relations in that question. Ticart, founder & chairman of Tocqueville Asset Management, says:

Listed companies, the analysts who follow them, and the executives who run them have become increasingly short-term minded in recent years. Stocks now routinely respond to whether they “beat” or “miss” quarterly consensus estimates of sales and earnings, and much of the stock trading takes place on that basis. Needless to say, quarterly earnings have very little to do with long-term strategies or other fundamental factors. By focusing on them, financial analysis has become nearly useless to long-term, fundamental investors.

So think about IR: We say we want long-term investors, but how much energy do we focus on quarterly results and short-term fluctuations, and how much effort do we devote to communicating strategic drivers of our business over a 3-year to 5-year time horizon like the one Ticart favors? Are our own IR efforts part of the problem?

© 2014 Johnson Strategic Communications Inc.

Advertisements

What’s wrong with this company?

May 31, 2011

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.

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.

Good news for BP shareholders?

June 1, 2010

Let’s not take this to extremes, but a recent study offers the counter-intuitive notion that companies with great reputations don’t generally provide great returns for investors – and a decline in corporate reputation can presage better returns.

In the Spring 2010 issue of the Journal of Portfolio Management, economist Deniz Anginer and finance prof Meir Statman look at Fortune magazine’s “Most Admired Companies” rankings from the start of that survey in 1983 up through 2007.

The annual “Most Admired” survey reflects opinions of executives, directors and analysts on companies in their own industries.  You might expect the stocks of firms with the best reputations to perform best in the market, but it just isn’t so.

The authors compare portfolios of higher-reputation companies vs. lower-rated firms, looking at 12-month returns following publication of the “admired” ratings:

We find that stocks of spurned companies, or those with relatively low Fortune ratings, beat the stocks of admired companies, or those with relatively high ratings.

… we also find that stocks of companies that moved up the reputation scale lagged stocks of companies that moved down the scale.

This study looks at a relatively short-term trade, a 12-month adjustment after a reputational change takes hold. It doesn’t consider multi-year differences in returns or valuation between respected and disrespected firms.

The authors also don’t explore causes of their counter-intuitive finding. But I believe a key factor is that reputation surveys are lagging indicators:

  • A company is recognized for rising reputation after peers in its industry see it deliver strong results, an increasing stock price, high-profile successes. And then? Well, high-flying companies and stocks tend to revert to the mean.
  • When bad things happen to a company, peers and analysts are quick to cast blame – the stock drops, company reputation sags. And then recovery begins.

The JPM article confirms what many value investors practice: Out-of-favor stocks may yield more opportunities than “admired” companies riding the wave, for the simple reason that less-popular companies are cheaper than glamour issues. And at least some of the high-multiple stocks are going to hit bumps in the road.

Of course, it isn’t much of an investor relations story to say “Our reputation is in the tank, so things can’t help but get better.” And IR people, as champions of our companies’ reputations, all want rising earnings, strategic accomplishments, recognition in places like Fortune … the good news that creates solid reputations.

But when times are tough, we may find some comfort in the reversion to the mean.

© 2010 Johnson Strategic Communications Inc.

Thanksgiving thoughts

November 26, 2009

In the USA, we celebrate Thanksgiving today. The tradition has less to do with thanking each other for kindnesses extended than it has to do with thanking our Maker for the grace and mercies He extends. It’s a time for counting our blessings.

Avi Ifergan, an asset manager in Israel, shared good thoughts on thanksgiving a couple of years ago in a post called “The Relationship between Gratitude & Value Investing” in his Israel Value blog. (The blog went dormant after Ifergan got a gig with a bank in 2008, but it’s still interesting to browse for comments on investing.)

The point on value investing is that appreciating value in an asset that others don’t appreciate springs from a habit of gratitude in all areas. So investing meets life. He cites examples of humility and gratitude from Warren Buffett and other investors.

Ivergan offers these thoughts on reasons each of us should feel grateful:

If you woke up this morning with more health than illness, you are more blessed than the million who will not survive this week.

If you have never experienced the danger of battle, the loneliness of imprisonment, the agony of torture, or the pangs of starvation, you are ahead of 500 million people in the world.

If you can attend a church / synagogue meeting without fear of harrassment, arrest, torture or death, you are more blessed than 3 billion people in the world.

If you have food in the refrigerator, clothes on your back, a roof over your head, and a place to sleep, you are richer than 75% of this world.

If you have money in the bank, in your wallet, and spare change in a dish someplace, you are among the top 8% of the world’s wealthy.

If you have ever made a phone call, you are ahead of 50% of the world population that never has.

And if you are reading this blog – and have access to the internet then you are ahead of 90% of the world population that does not have access to the internet.

We have more than ample reasons to be grateful. So, whether you’re in America or a place with other holiday traditions, happy Thanksgiving!