Monday, March 24, 2014

IR Magazine: Should You Pay for Equity Research

Should you pay for equity research?

Sell-side cutbacks have left more companies contemplating issuer-sponsored equity research. But not all providers are equal
As many companies know through painful experience, a lack of research coverage is a serious impediment to attracting new investors. Without it, investors may view a business as unvetted or too difficult to value. 
View the balance of the article, in which Tim Human included some of our thoughts, here:
Additional thoughts: We would argue that issuer-paid research is no more biased than most sell-side research which is provided by investment banks that have raised money for the subject company and/or hope to secure other fee income from banking, M&A or other advisory work. No one shows up to Wall Street to work for free. Everyone has some sort of agenda. 
Other key benefits of such research is that it can provide forward earnings estimates - in major earnings estimate services like First Call - for Companies that have little or no formal research coverage and therefore have no estimates or estimate consensus. Such estimates are helpful to investors who are screening for stocks or taking an initial look at a company - it helps them gauge the growth rate and efficiency of the organization. 
The other benefit is helping to bring disparate information all into one place - financials, management comments and strategy, recent releases, industry valuation metrics, competitive and industry factors, and valuation parameters. It's 'Cliff Notes' for equities. I expect that investors will do their own work to analyze and value the Company - but this research helps get you their radar screen.  It's principal benefit is in idea generation.
Lastly, as there could be alleged some aspect of "implied endorsement" when a company distributes a report that has been written on them - this concern makes most companies refrain from distributing either sell-side or company-sponsored research reports. Given this dynamic, the distribution channels the research provider brings to the effort are particularly important. If a research report is issued in the forest - few will read it without some proactive intervention.  Finally, 'marketing' a research report is also very important.  That helps connect all the dots - putting the Company and management together with the report and the investor - to ensure that the analyst and/or PM really focus on the story.  It's a multi-step process leading up to actually getting an investor engaged in a new story. 
Our thanks to Tim Human for raising this important issue - and showing how different times may require different measures.

Monday, January 13, 2014

Social Media – Leveraging Existing IR Assets to Attract New Eyeballs

In April 2013 the SEC made a bold, progressive step in condoning social media for Reg. FD compliant disclosure. IR professionals must now figure out how or if to follow that lead.

While 70% of IROs report NOT using social media, we believe engagement will grow as precedent mutes legal concerns and the benefits become better understood. In our view social media enables more frequent and granular investor dialogues fostering greater understanding through additional data, anecdotes, perspective or review. It can also play a key role in crisis communications, provided the channel is established well in advance.

But the most compelling argument for IR social media is that it provides an easy low-cost way to leverage your investment in existing IR assets, putting them before new investors, bloggers & media with similar interests. It’s no panacea, but over time builds a growing base of awareness and interest that can favorably influence your stock price. To be fair, the potential benefits of IR social media seem more compelling for smaller companies who struggle to develop investor interest against market currents that favor size and liquidity.

The Myth of Non Engagement
For now, social media’s importance to IR seems a near-sighted measurement of investors NOT engaged in the medium by similarly positioned IROs. Yet a brief visit to StockTwits, SeekingAlpha or Twitter confirms existence of a sufficiently large and growing audience to warrant our attention. Social media has also been validated by hedge funds who filter it to guide investment decisions, by Bloomberg’s integration of Twitter feeds into its financial information platform, and lest we forget, @Carl_C_Icahn, who’s 59 posts to date have drawn enormous Wall Street attention and 123,000 followers.

Your Company is likely the subject of an active social media dialogue that is shaping investor perceptions without you. 

And guess what? Your Company is likely the subject of an active social media dialogue that is shaping investor perceptions without you. Doesn’t it make sense to balance those communications with approved company messages?

You’ve got my attention; What would a social media IR program look like?
Because social media is an adjunct to your existing IR communications, the same disclosure rules and regulations apply. Despite the SEC’s comments, we do not recommend using social media to initiate material disclosures and our comments reflect that posture. However, we do recommend following the SEC’s guidance to publicly state which social media channels you use for investor relations, thereby protecting your social media efforts.

A formal social media program and plan should be developed along with policies and designated persons for the review and posting of messages and responses. This policy should be reviewed by management and counsel and updated at least yearly for any changes in practice, participants or approved social media forums.

Leading IR social media forums include Twitter, SeekingAlpha, StockTwits, SlideShare, LinkedIn, Facebook, Boardvote and Stockr. To reflect the unique needs of investors, public companies should establish standalone IR social media accounts. The “IR” suffix is frequently used and easily differentiates IR content from other social media communications (ex.  @CompanyIR).

We recommend using the same account name across all channels if possible. There is no cost to set up most accounts, though it does take some time to create a professional profile and presence. Protect account access by using strong passwords and 2-step authentication. Once set up the posting of approved messages takes just a few minutes and will become an  automatic part of your communications work flow.

But what are we posting? How do we maximize our success?
Social media is a “force multiplier” for the visibility of the IR communications and collateral you work so hard to create. Most of it has been disclosed on the wire or via Edgar and is available on your website or those of other organizations, making it easy to provide direct links. Thus, much of a basic program can merely involve providing links to IR collateral.

IR Social media content can include:

·      News releases, call transcripts & SEC filings
·      Presentation and conference call alerts
·      Presentations, webcasts & videos
·      Media coverage, interviews, blog posts & social media
·      Product brochures, photos & web pages
·      Research or other industry or governmental reports or white papers.
·      And a range of custom content we’ll save for another article.

Unlike financial portals where content is .... hidden ... based on stock symbols, social media is an unstructured fire hose of information... rationalized by key words...

Links to this content on their own, however, have little visibility or value (though we see them all the time) without a clear introduction. Unlike financial portals where content is safely ordered (and hidden) based on stock symbols, social media is an unstructured fire hose of information. That data glut is rationalized by key words or “hash tags” and stock symbols. In addition, “Follower” and “Followed” functions allow users to filter the torrent down to subjects of interest.

Each post must make clear what content is being referenced and why it is worth viewing. Assume it is the reader’s first interaction with your Company. Keys to successful posts include:

1)    Write clearly and succinctly, to be understandable to anyone. It takes time to winnow a message into 140 characters. Abbreviations and informal style make this possible.

2)    Use appropriate stock symbol nomenclature (generally a $ before the symbol as in $GOOG) so that all your posts are referenced to your symbol. Credible use of other relevant stock symbols will also aid your post’s discovery.

3)    Use “hash tags” as they are known on Twitter to reference your post to topics of interest searched by investors, such as #healthcare, #energy, #Japan, #timber & #retail. Use the most popular hash tags but also experiment to reach a different audience. Hash tags position you for discovery by those who DO NOT know your company or stock symbol. This is our primary reason for IR social media engagement.

4)    Link your accounts so that a post to one will automatically syndicate to others. But read the fine print to optimize your visibility by originating posts on certain sites and syndicating them to others. Be careful, some sites let you delete posts; others do not.

5)    Twitter averages 500M tweets per day across all topics, so even after a few days, a search might not yield your post. To unbury your post, delete and repost it (our recommendation), alter or add a photo or video and repost, Retweet, comment or favorite it.  

     Below are examples of social media posts on StockTwits. The top set of posts shows normal text posts and the following three examples show how the posts cut through the clutter better with the use of a graphic (photo, chart, etc.).

Showing our client's lithium replacement
 battery aboard an electric fork lift.

Showing our client's diagnostic device in action.

Highlighting our client's CEO and his Twitter page. 

We hope these comments have taken some of the mystery out of social media for IR - and how it can be easily implemented - and provided some valid reasons to reconsider your reluctance to enter the fray. We look forward to your comments and questions.

David C. Collins
Managing Director
Catalyst Global LLC – Capital Markets Counsel
January 13, 2014

Wednesday, December 11, 2013

Response to IR Magazine's Question - Does IR Need an Overahaul

Does IR need an overhaul?

The following are our thoughts on the issue Laurie Havelock raised in IR Magazine.  

We are a bit slow to the discussion, having only seen this article today.  YES IR needs an overhaul, but we don't think it's IR as much as the highly conservative, restrictive environment and fear mongering that limit us in trying to communicate what's going on to the people who own the companies we work for.

Fear of class action litigation, SEC reprisals and a strict adherence to the status quo (the Company's or its peers) cause far too many companies to pull their communication heads into their shells.  No amount of leadership or innovation in the IR role can overcome a C-suite that abrogates its responsibility by following the advice of its counsel and auditors to take the safe route, admit no problems or concerns, make no projections and to say little or nothing of real value to guide those who own the Company. Our function has become "disclosure" rather than "communication" and yet IR practitioners have very little power to overhaul the framework to improve our ability to speak freely about what's going on. Every aspect of business involves risk, and generally the riskier the initiative, the greater potential value it may create. We view good management as needing to listen to all of its advisors and then make decisions that make the most sense for the Company, not decisions that eliminate risk.

As counselors who work on retainer, we can't help but notice that the most influential people in what becomes the "final word" on strategy & communications are IN NO WAY measured, judged or compensated in relation to the creation of shareholder value. Unfortunately and cynically, their compensation in reviewing communications is in direct proportion to the extent of their edits. Yes, there are many fabulous, pragmatic attorneys and auditors – who do understand what IR is trying to achieve and will accede to a strategy that involves some nominal amount of risk in an effort to enhance the potential reach and success of a communication and an overall program.

To illustrate how bad things really are, most companies are even fearful of using quantitative measures or abbreviations in their headlines, such as "XYZ Q3 Revenues Rise 15% to $525M on Strong Widget Demand in Europe." We have submitted headlines like this - which are intended to differentiate the Company and draw in new investment interest, only to have them lobotomized into "XYZ Allied United Industrial Corporation Reports Fiscal 2013 Third Quarter Financial Results of Operations for the Periods Ended September 30, 2013."  Not only does it say little - it take more of an investor's precious time to slog through the formality. 

And the people who denied the first version and insisted on the language of the second got paid by the hour to homogenize any semblance of communication right out of the release. Their fear, as we have often heard, is "what do we say if revenues are down next quarter? We must be consistent quarter after quarter." That fear makes us unable to communicate about what's going well because of some vague fear that a negative event occurs down the road that will force the Company to publicly discuss it - as if investors wouldn't notice if we didn’t put it in the headline!?!  Does the SEC insist that our headlines be uniform?  Is a headline considered a standalone disclosure or does the body of the release count?

The same fears keep us off of social media and prevent us from sharing analyst reports or estimates because of the danger of implied endorsement. The same fears force us to use overly wordy and qualified sentences (do we really have to qualify that the quarterly comparison is versus the prior year’s period when a full P&L is provided in the release? Our view is that year over year is implied, anything else needs to be clarified.) These fears also prevent us from taking full advantage of the safe harbor protection. To we really need to clarify to investors that things might turnout differently than we currently expect – that we had a one-time, non-cash write down of our crystal ball to reflect the end of its useful life?

The same legal strictures force us to spend a lot of extra time and money in every release to reiterate our risk factors, but then leave us to worry if our other utterances are similarly protected.

In seeking to protect investors and provide clarity - we seem to have done the opposite. We are damaging the public company’s communications function, limited what information can be provided, and ratcheted up the costs in an effort to try to stymie the minority of players with evil intent. Probably the best way to reboot IR would be to reform our securities laws and liability - so that a good faith effort to communicate is an asset not a liability and that investors be given some semblance of responsibility for knowing what they own, reading our disclosures and understanding that nothing in life is completely predictable.

A lot is at stake in this question in our view, the costs and challenges of being a smaller public company have grown increasingly burdensome at the same time Wall Street – both the sell-side and buy-side – has been moving away from supporting such companies. Yet small companies have long been the font of job creation. Yes we need to overhaul IR and a good deal more.