Should a stock like COKE rise 20% in a day? 

Executives love it, sure. But it’s aberrant behavior at loggerheads with what the dominant money buys today. 

Here’s what I mean.  COKE is a member of MDY, the Blackrock (iShares) S&P midcap 400 ETF, with data licensed from S&P Global. Blackrock needs stocks that track it within 2% variance of the index’s performance. 

Big jumps on earnings boot stocks from Exchange Traded Fund (ETF) baskets. 

In August last year, COKE also soared on results. And it was removed from “the basket,” the statistical sample used by index funds and ETFs to stay within 2% of the benchmark the fund tracks. The stock by September traded below its mid-June price. 

Same thing happened in November when the stock shot past MDY.  At Dec 29, 69% of the trading volume was short – borrowed, created by market-makers – and it declined back in line with MDY and then dipped below it.

Now, one could try to argue that something about COKE fundamentals prompted realignment with the midcap group. But money chooses models, not fundamentals. Data proving it abound. Money now wants size and liquidity and low volatility.

Soon it’ll be key words. Bloomberg’s Greg Ritchie and Justina Lee report that JP Morgan is launching IndexGPT, a “new range of thematic investment baskets” – there’s that word again – organized with the help of ChatGPT. The machines will generate key words and search news for companies matching them.

Key words are things we at ModernIR see as essential ingredients in the investor-relations arsenal. If you want to know more about revamping your news releases to leverage your characteristics, ask us. It’s the future, the direction of the market (not stock-picking!).

Much of COKE’s one-day barnstormer reflects a plan to buy back about 40% of its outstanding shares. 

Once again, here’s a decision unsupported by data on the trends in investment.  The number of public companies continues to decline at an alarming rate.  There are so few midcap stocks – last year there were 289 in the Wilshire 5000 Midcap Index – that Wilshire cannibalized small caps and large caps for product, revamping its methodology.

The last thing a public company belonging to the Russell 1000 should be doing is buying up the product that Blackrock needs: shares.  Distribute cash. It’s better and preserves your float, your size, your liquidity. 

So, why don’t boards and c-suites understand it? 

I’ll leave that question hanging. The point is, once you’re in the basket, try to stay there.  Money buys size, liquidity, and the ABSENCE of volatility. 

Juicing your stock with your earnings release is really fun and exciting. And it blows you out of the statistical basket like a cheap drone in a shotgun fight. 

The job of public companies is to control the controllables that land you in the basket and keep you there.  Why?  I’ll give you two trillion reasons. That’s how much ETF assets in the US market alone grew the past year.  And half of that growth came via outflows from Active funds (both equities and bonds).

To keep ETFs once you’ve got them, you want to minimize volatility.  What fosters volatility?  Machines and bets.  Machines set your prices. When you report earnings and pump out a bunch of data, machines will magnify the underlying bets made by hedge funds.

Hedge funds aren’t betting on whether you beat or missed consensus, raised or lowered guidance. Those are arbitrage opportunities, sure (arbitrage is nothing more than betting on changing prices).  They’re betting on alternative data on your products, services, financials, supply chain, customers, growth rates and more. 

The bet may be predicated wholly on the over/under, so to speak.  Or like betting on Mystic Dan in the Kentucky Derby last Saturday, one data point that wins by a nose but pays 34-to-1.  Thus, it’s not your results that matter but the data you release.

We’ve given this a lot of thought and we’ve built a process and product around keeping you in the basket. You can ask us about it, public companies.

But the moral of the story is simple:  It’s cool to rise 20% on your earnings report. It’s also anathema to the money you need to attract. Repeat this: Volatility is our enemy. What are we doing that’s driving it?