Tagged: market capitalization

What We Do

We’re about to decamp for Switzerland for the month of July.  It’s an example of time and experience changing what we do. 

We’re blessed to have the freedom and means to do it.  But that’s not the point.

The Pandemic and observation – seeing our aging relatives, aging friends, no longer able to do what they’d want, right at the point they’ve got the time and money to do it – have prompted us to seize the day.

Illustration 121184273 © Noree Saisalam | Dreamstime.com

We won’t always be able to ride bikes from Montreux to Zurich.  But we can now.  So we’re doing it now.

Which gets to the question I hear most from investor-relations people.  They’re intellectually interested in “market structure,” the way the market works.

After all, we’re the professionals (a line critical to the great Denzel Washington movie, “Man on Fire”).  We’re supposed to know how the stock market works.

And so often I hear, “What do I do with it?”

If you were to learn through God or some miracle of science (oxymoron purposeful) that you had ten years to live, what would you do?  Keep on doing what you’ve always done?

Here’s what the data show irrefutably about the stock market.  And for backdrop, I think we’ve written more about market form and function than anybody in the USA, right here on this page.  About 800 words per week, nearly every week, since 2006.

I’ve testified to Congress (in writing) about how to improve the market for issuers and investors.  Been on CNBC talking about market structure.  Done it in our profession for two decades.

And I summed up the Essentials last week. Three things every public company should be doing.

If you’re a smallcap, go big or go home. You can’t stay small. If you’re a public company, you should understand the cadence and rhythm of the stock market – its context, let’s call it – and don’t put out earnings, important news, during its violent thunderstorms (options-expirations, rebalances).

And your principal job now is using data to help your executive team and Board of Directors make good decisions about deploying shareholder capital. 

It’s not telling the story to a diminishing audience.

Look, I don’t mean people aren’t showing up at Non-deal Road Shows, sellside conferences. I mean stock-pickers are an endangered species that doesn’t set prices.

I don’t know a profession less data-driven than ours. We do a bunch of things out of tradition, not data demonstrate returns.

Many a time I’ve sat in meetings with IR people who argued that “we’ve got a pretty good sense of what’s going on.”  And they don’t even know what Reg NMS is. 

Would you run a business that way – got a pretty good sense of what’s going on? How the can a professional pursuit like IR, which has a certification program?

You could be the Zoom Video Communications (ZM) investor-relations team talking to investors in 2020 – by web meeting – and think you’re just killing it. And that was before anyone had heard of ZM.

And you could be the ZM IR team now, a ubiquitous brand name and a massively larger business, talking to investors and the 30-odd sellside analysts covering the stock, and it trades below where it did in Mar 2020.

Because telling the story to this crowd doesn’t create shareholder value.

Asset allocation – the earmarking of money to parts and groups and slices of the market according to a model – and speculation, furious trading, and leverage with derivatives, create and dispel shareholder value.

You can measure your Engagement with stock-pickers quantitatively (we do it) but they don’t set prices more than about 10% of the time.

At this moment, it’s a great time for ZM to call on holders. Because the Supply/Demand balance – every public company should know that balance (and you can, just ask) – is favorable.

What you do with it is you ground your company in reality and make the most of an equity market that’s not driven anymore by stock-pickers.

How much money do you spend on targeting, tracking interaction with the buyside and sellside, keeping up with what your peers are doing? About $50,000 annually?

And how do you tie that to shareholder value with data? 

You can’t. It doesn’t.  You CAN use data to help your company make the most of the market.  Just not that data. 

What we come to understand about life should affect how we participate in it.  And it’s all about what we do with the time we’re given.

The same applies to the IR profession, or any endeavor for that matter. Knowledge should change what we do and how we do it.

Investor-relations is the data-driven mission to maximize listing in public equity markets, which starts with understanding the stock market.

And with that, we’re off to Switzerland.

The Essentials

Skip meals, give up beer, burn calories. 

That combination lowers my weight.  The essentials.  In fact, depending on the amount of meal-skipping and skipping-rope (well, riding bikes), I drop pounds in days.

Illustration 186661760 © Balint Radu | Dreamstime.com

What’s the equivalent for creating shareholder-value, public companies?  We ought to know if we’re in the investor-relations profession (as I’ve been for 27 years).  And investors, you’d do well to know, too.

I could give you a list as long as an election ballot of people on TV telling investors to “buy the stocks of great companies.” 

Nvidia is a great company. Zscaler is a great company.  Heck, Netflix is a great company that made $3.53/share last quarter and trades at 15 times earnings.  It’s down 71% this year.

Occidental Petroleum is the best performer in the S&P 500 this year, up 92%.  Over the four years ended Dec 31, 2021, OXY lost $10 billion.  It paid so much for Anadarko that Carl Icahn fought a vicious battle to stop the deal.

You can’t just say “buy good companies.”  You can’t just be a good company and expect shareholder-value to follow.

That would be true if 90% of the money were motivated to own only great companies.  Energy stocks are up 38% this year – even after losing 18% last week.  You don’t have to be great. You just have to be in Energy.

That’s asset-allocation behavior, trading behavior.

Do you know that OXY and ETSY have exactly the same amount of volume driven by Active Investment?  About 9%. Etsy is profitable, too.  But its short volume – percentage of trading from borrowed or manufactured stock – has been over 50% all year and at times over 70%.

And 52% of Etsy’s trading volume comes from machines that don’t own anything at day’s end. Well, there you go. Heavily short, heavily traded. Recipe for declines.

Occidental?  About 44% of its trading volume ties to ETFs and derivatives.  Just 47% is machines wanting to own nothing. Short Volume in OXY had been below 50% until last week, when it jumped to 60% right before price dropped from $70 to $55.

Small variances in market structure are reasons why one is down 65%, the other up 92%. 

In sum, value in the stock market is about Supply and Demand, as it is in every market.  And Supply and Demand are driven by MONEY. And 90% of the money is trading things, leveraging into things via derivatives, allocating according to models.

And it pays to be big.  Occidental is among the 20 largest Energy sector stocks by market capitalization, Etsy is on the small side of a sector dominated by Amazon, Tesla, Home Depot, Alibaba, McDonald’s, Nike.

Callon Petroleum is a darned good company too, but where OXY is over $50 billion of market cap, CPE is under $3 billion, in the Russell 2000 instead of the Russell 1000 where all the money is. It’s down 7% this year.

How about Campbell Soup, Kellogg, General Mills?  Similar companies in Consumer Staples. Which is biggest?  GIS.  Which stock is up most the last year? GIS.

So Occidental did it right.  It got bigger. 

If Kellogg splits into three companies, there will be three choices rather than one for asset-allocation models.  In case you missed that news.  Maybe that’s good for business. It’s bad for size, and size matters (I think increasing operating costs and decreasing synergies is stupid but the bankers don’t).

Mondelez?  Big company. But it was bigger before shedding Kraft. It trades about where it did three years ago.

Lesson? Be the biggest thing in your industry that you can be.  If you’re Energy, become one of the 20-25 largest.

If quitting beer didn’t cut my weight, why would I do it? I love CO beer.  I want to do things that count, not things that go through the motions, form over substance.

Here are your essentials, public companies.  If you want to be in front of as much money as possible, become the biggest in your business.  You can tell your story till you’re blue in the face and it won’t matter if you’re $2 billion and the big dogs are $50 billion.

Another essential to shareholder value, public companies, stop reporting earnings during options expirations, because three times more economic value ties to derivatives paired with your stock than tie to your story.

Are we playing at being public, or taking it seriously? Stop drinking beer and expecting to lose weight.  So to speak.

And Essential #3.  Know your market structure. Investors, understand where the money is going (if you don’t know, use EDGE. It’ll show you. And it works.).  Market Structure, not story, interprets enthusiasm and determines your value.

Do those things, and you’ll be a serious public company, just like it takes three things for me to seriously lose weight. And it’s not that hard.