July 8, 2015

Babbling Happily

Picture a mountain river still crisp with snowmelt babbling happily.

Now imagine a town on its banks. Suppose thousands of people jammed the waters congenially in every kind of flotation device, laughing and floating downstream. That’s Steamboat Springs CO on July 4.

But babbling should not describe your interaction with the Board when you offer an investor-relations perspective. It’s the season, with earnings upon us soon again. There’s been extensive discussion at the NIRI Forum about what to convey to management.

Your IR section should articulate why shares underperformed or outperformed in the focus period (presumably the quarter), strengths and weaknesses in your equity (distinct from your story), and expectations about future performance. Sure, explain what you’ve been doing, who you’ve been seeing, what analysts and others have been saying. I offered them too as an IRO.  But management values strategic contribution. You’re the product manager of the equity market – which all else from the balance sheet to incentive plans depends on.

One IRO included four slides on the stock’s structure some weeks after a pivotal earnings report.  The first highlighted strengths and weaknesses, summarizing:

Strengths. Active value investors are buyers, setting price. Asset-allocators are back, signaling a return of passive sector money, a core driver. Short volume is down 14%, risk-management is down. These signal renewed investor-commitment and lower risk, the purpose of communication.

Weaknesses. Investors were surprised by weak execution and sold reactively, and despite improvements in risk-management behavior over intervening weeks, it remains high relative to long-run averages for the stock. Investors are challenging us to deliver.

Let me explain risk-management. Do you have life insurance? It’s protection that comes at a cost. Money spent on mitigation is less to spend elsewhere.  Investors put money into your shares, which are a risk asset, and they insure them with forms of risk-management or hedging – options, futures, swaps, pairs trades, shorting. If they spend more managing risk, it implies uncertainty.

When it becomes more profitable buying and selling insurance on your shares than it is investing in your story, that’s the definition of “short-termism,” and it’s measurable and observable. If risk-management declines along with investment demand, investors are planning to direct less money to your shares in the future. They hedge what they hold and they stop spending money on hedges that aren’t needed.

Back to our example, the IRO also included a graphical representation of market behaviors before and after results, a table of key comparative market-structure metrics either side of results, and a slide that set forward expectations, which concluded unwaveringly: “(the ticker) is now a VALUE proposition and must deliver VALUE results first before it can again attract growth money that brings price appreciation.”

Don’t miss this point. The company considers itself a growth story. But with value money as buyers following a reversal, retaining base value in shares requires a focus on value drivers and value results – cost-containment, wise capital deployment, returns on equity and so on.  You know them.

Management teams often confuse the business with the equity.  If all the investors in the market were buying fundamentals, the two would be the same. But over 30% of market volume is asset-allocation. Blackrock and Vanguard don’t listen to earnings calls but they’re the biggest investors. To them you’re an equity product, not a business story. Intermediaries drive half your volume. They’re middle men. To them, you’re a product with appeal to different consumers.

Discount these factors at your own risk. Don’t just list accomplishments, news, coverage, investors, in Board reports. Present your equity market strategically. Wrap that information in powerful directives reflecting the reality of the product.

This is IR in the 21st century.  You’re not tubing down a river of roadshows and conferences, a buoyant stenographer. You’re a product manager. We have the data, metrics and experience to help you manage and message best.

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