April 19, 2023

Real World

It’s earnings season. 

And once again the shows on CNBC after the market closes are trying to explain in rational terms why stocks are up or down (NFLX, UAL, WAL, etc.).

And investor-relations people, why the stock is up or down is a core pursuit still for us, 54 years after our profession commenced! (If you’re doing it like it’s 1995, drop us a note, and leave the past behind.) Don’t answer like you’re CNBC.

Photo 150574398 / Corporate Earnings © passakorn vejchayachai | Dreamstime.com

To wit, everybody is talking about Netflix.  It plunged out the gate, down 12%.  As I write, it’s trading up after hours, a swing of a good 15%.

Results beat expectations on the top and bottom lines.

The first person I heard on CNBC as the stock swooned, a sellside analyst I know, said the results were disappointing because subscribers didn’t grow as much as people hoped.

And Netflix has wisely ceased giving subscriber guidance. The more guidance you give, public companies, the more you become a betting opportunity. You’re catering to DraftKings. So to speak.

Every data point you offer is a reason for a bet. Keep that in mind.

On a show called Fast Money they’re talking about how the average revenue per user is a lot better than expected in the advertising segment, and THAT’s why NFLX is rebounding!

Well.  That requires the assumption that trading after-hours is rational.

In fact, it’s my biggest complaint with market news.  All of it supposes that stocks rise and fall because investors’ expectations are continuously morphing.

If you’ve not yet seen these slides, here you goIt’s a short deck. It shows in stark data, that we are not making up and which we did not create, that stocks cannot possibly reflect rational thought all the time.

Because that’s not what the money is doing.

If you run investor-relations for a large cap growth stock, you are wasting time and money targeting investors. Why?  Because 98% of large cap growth stock-pickers don’t beat the benchmark.

If you don’t deliver returns for investors as a money manager, you lose assets.

And by the way, if you’re an investor and you’re paying somebody to pick stocks, you’d better check results. Roughly 70% of all stock-pickers trail the market.

There are other reasons to have money managers but follow me here.

Our job in investor-relations isn’t telling the story. That’s PART of the job. I keep repeating it because a bunch of new members of our profession are marching zombie-like back toward the past.

If you doubt me, go look up your own 13Fs for the last five years.  Check holdings for big Passives like Blackrock, Vanguard and State Street. Compare them to your (formerly) large Active holders.

Who’s winning?

Another data point: 70% of the assets at Blackrock, Vanguard, Fidelity, State Street, UBS, JP Morgan and Morgan Stanley — $40 trillion – are following models.

Do your Board and c-suite know that?  Does your IR program and what you’re conveying to your executive team and Board reflect that trend?

Investors chiefly buy characteristics today.  They’re putting money into models exposed in varying degrees to equity and fixed income.  Returns in private equity are vastly better than in public equity – well more than twice.

So the purpose of the public equity market is really to provide liquidity.  Very much like most IPOs now, which occur not to raise capital but to deliver LIQUIDITY to the investors financing private growth.

It’s a fact. Our stories should be streamlined, bulletized, minimized. We need to focus on CHARACTERISTICS. How do we help our boards and executive teams create a vehicle that wins assets as a PRODUCT?

That’s our job now.

Stocks rise because there aren’t many products (more money chasing fewer goods).  As the slides I shared above show, there are less than 500 large caps tracked by Wilshire, about 300 midcaps. And those stocks are most of the market’s value – over 90% of it.

The goal is to belong to that group.

Of the roughly 3,600 stocks in the Wilshire 5000 (the total market), almost 3,000 are smallcaps and microcaps comprising 5% of market cap. If you’re in that group, M&A is your only way out. Craft a rollup strategy.

We’re spending too much time and money machinating over story.  Trading after-hours is all occurring outside Regulation National Market System. It’s all occurring in broker-operated markets, not at stock exchanges. It’s mostly hedge-fund bets, and machines.  That’s the only money of size there.

Okay? Don’t use it for much other than a signal about BETS.

By the way, those are in large part measurable, and can be modeled predictively. You should be doing that. Ask us, and we’ll show you how.

But we’ve got to operate in the real world, investors and public companies.  Know how the market works, what the money is doing. Set yourself free from the past.

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