It’s earnings season. Do earnings drive alpha?
For instance, we left Apr 9 for the Caribbean. The market tanked. We returned to reality Apr 21. The market soared. Correlation? Causality?
By the way, if you want a sampling of life on a boat, here you go. We’ve done it a long time now and it’s a magical way to escape reality. Seven of us and a crew of two spent a week from cove to cove in the British Virgin Islands.
And public companies spend a great deal of time and money trying to generate alpha. Excess return above risk. Not alpha as the pack leader.
Funny alpha story. Our Cavalier King Charles spaniel Clyde decamped for a vacation with Brian Wilson on the ModernIR team while we sailed. He immediately claimed alpha status among the Wilson canines because nobody else wanted the job. But he was shortly dethroned for thinking all food was his.
I told him it’s a life lesson. He’s gotten over his fall from power.
Back to the story, the aim of the earnings release is to get attention from the money. We wordsmith the message, machinate over terms, pack it with bullets and data tables to drive alpha. And stocks react, sure. Think of LYFT, PANW last quarter. JBLU yesterday. Heck, Globe Life shrugged off 14% of Fuzzy Panda’s short attack.
But do we understand the money?
We can’t control how stocks move. But we have control over the information we’re putting out.
Passive money needs to track the benchmark. The benchmark, such as the Nasdaq 100 or the S&P 500, or whatever, rarely moves 1-2%. Yet the stocks comprising those benchmarks average roughly 2.5% daily volatility.
How is it the benchmark moves half the broad market? Because a statistical sample creates the benchmark. The State Street SPDR ETFs don’t own all the stocks in every sector. They own a sample.
The sample becomes the benchmark.
Public companies, you want to remain in the sample as often and as long as possible.
How? By muting volatility and leveraging your characteristics.
Passive Investors are the diametric opposite of Active Investors. They want beta, the performance of the benchmark. They’re not picking stocks but selecting a sample with the same characteristics – which then become the characteristics of the benchmark.
If a fund deviates more than 2% from the benchmark for a period of time, it may be fined by regulators for failing to deliver the results purported in its prospectus. And fund distributors may stop marketing it. The fund could go out of business.
So the basket used to track the benchmark constantly changes, to remove volatility.
Throw out that nonsense about Passives just following the market. It’s bosh.
Passives are netting all the inflows to equities (Actives lose billions every year, net). They’ve got money to deploy. They buy the herd – stuff that looks and acts the same.
Thus, 95% of the money is in the Russell 1000, 88% of it in the S&P 500 alone.
I’ve used this analogy before. On the cattle ranch of my youth, we took stock to auction manifesting the same height, weight, color, age, sex. We wanted buyers like Cargill, Swift (the names have changed today), to take the whole herd.
Bring a mixed herd and the ring rider cuts out the short ones, tall ones, different-colored ones, and the buyers offer less for them.
Quarterly earnings are at loggerheads with market structure. Blackrock, Vanguard and State Street want a herd that moves the same. The regulators help by promoting rules that bring uniformity to trade-size.
And then along we come in the investor-relations profession barreling through the beta with an alpha-bent, arbitrage-laced earnings release. By peppering earnings releases with data differentiators, public companies unwittingly undermine their own best interests.
Look, I’m saying that with a satirical twinkle! It’s not our profession’s fault. Nobody has explained it. That’s what ModernIR is doing every week.
Well, Tim. What would you have us do then?
Know your audience. Machines read your earnings releases and trade your stock instantly in response to discordance in data in your release and their databases (the data is everything, not consensus).
And Passives dump volatile stocks because they deviate from the benchmark.
This cycle repeats every quarter.
Change it. Say little in your earnings release. Do say what kind of product you are – a large cap growth equity in the Technology sector. Or whatever. Do provide all the data on your website.
You could say:
“XYZ, a large cap value stock in the Financials sector, reported results for the first quarter of 2024 today. See them here. We’re delivering value to shareholders through cost-management, business-execution, and dividends. Thank you, good-bye.”
That short bit of information (saying what you are as beta, and incorporating your characteristics) would do more to dampen volatility and promote shareholder value than 100 one-on-ones with stock-pickers, an analyst day, a bunch of sellside conferences.
How do I know? Because we measure the data. And because it helps you keep your Passive holders. And they have all the money.
If you want to know more before you report earnings again, ask us.
