Thursday, March 31, 2016
Responding to an informed blog post by PR Newswire about the black-balling of social media with the halls of IR-dom, we vented our spleen a bit in embarrassment of the position being taken by a majority of IR professionals.
Investor relations and social medi(um) to luke warm
Investor relations and social medi(um) to luke warm
Tuesday, February 9, 2016
Wall Street Short-Termism – Companies and Their Guidance are Not to Blame
While we applaud Larry Fink and other Wall Street leaders’ speaking out on the dangers of investment short-termism in Wall Street, we are not convinced that the corporate profit guidance practices he critiques are the cause of short-term thinking in Wall Street. We also find no small amount of irony in Wall Street pointing the finger at companies. We do share his concern about a dearth of longer-term thinking and capital allocation in Corporate America, as that does seem largely missing from Wall Street yet critical to long-term growth and success.
In theory stocks are valued based on the expected future financial performance of the underlying company. Management guidance – profit or otherwise – is an attempt to help investors understand where the company thinks it is going, and who should know better than the company itself? Absent corporate guidance on where the financial chips are expected to fall, Wall Street picks up the slack and provides its own estimates to shape investor expectations. Headlines and post-reporting trading activity tend to focus heavily on results vs. the expectations codified in consensus estimates, and sales calls go out encouraging investors to react to this short-term progress measure.
In this context, Mr. Fink’s suggestion to reduce or eliminate company-provided data-points and perspective regarding where it is going and the anticipated impact on its financial performance does not appear to benefit to anyone. In fact, the less guidance companies provide, the more likely Wall Street expectations can become off kilter. Such a divergence can only reduce investor confidence in the visibility of future financial performance, with a corresponding reduction in the company’s valuation – an unfavorable feedback loop resulting from Mr. Fink’s suggestion.
In our view, the real problem is not profit guidance but the Wall Street business model that makes active trading far more profitable than buy-and-hold investing. The whip-sawing of capital in and out of various investments generates commissions on each transaction, and in the case of funds offered by Mr. Fink’s firm, their fees/loads are higher the more frequently assets are moved from one fund to another.
So it seems to us that the structure of asset management and performance fees, along with fund advertising/marketing that highlights short-term performance to attract new investment (or defend existing investments) is a principal driver of short term thinking, not corporate profit guidance. We also believe that the genesis of activist investing is principally rooted in the growing pressure to accelerate shorter-term investment returns.
Wall Street has set up the rules of the game of current markets. It is this ecosystem that must take responsibility for the pressure to deliver short-term performance – as well as the corporate response to dealing with this very apparent set of rules.
The rapid growth of the volatility and short-term focus that Mr. Fink seems to critique is not unrelated to the corresponding decline in average Wall Street commissions. Increasing transaction activity has been required to make up for lower commission rates, but this trend creates clear disincentives for supporting long-term investment strategies.
So rather than blaming corporate guidance and disclosure practices, perhaps Mr. Fink and his cohorts should ask whether they have done all they can to create business and compensation models that support a longer term investment view.
We would guess that there is much that BlackRock could do to refine its methodologies, business model and communications to focus its teams and customers on long-term results. That effort would help foster an environment where companies could feel more comfortable to do the same with their strategies and investments.
The securities industry and the financial media could go a long way to helping in this endeavor as well, to wit – one of our clients recently reported very impressive year over year improvements in its business – and yet the Wall Street response was to ignore the 44% revenue improvement year over year – and the $7M positive swing on the bottom line.
Instead, the media coverage and trading activity ignored the impressive improvement and instead focused on the Company having “missed” the revenue estimate and the bottom-line estimate of just one analyst covering the stock. The company in question provides no profit guidance, is making long-term investments in its business that Mr. Fink would applaud – but the market reaction was the same.
Given this orientation toward the precise predictions of near term results – with or without a company’s help – is a company to blame for trying to help shape Wall Street expectations with profit guidance? Who takes the reputational hit when a company “misses” expectations set by Wall Street? From our experience it is the Company, NOT Wall Street. We’ve never seen a headline that stated that analysts “missed” the quarter.
For these reasons, we believe it is an investor relations imperative that companies do all they reasonably can to inform investors on their plans, outlook and financial expectations. This effort helps ensure that third party expectations are as in-line with those of management as possible. Explicit earnings guidance is one such means of achieving this goal, however there many less granular ways of achieving the same thing.
Lest small or microcap companies take Mr. Fink’s advice to heart – their plight is even more challenging as their limited visibility, sponsorship and liquidity create even greater volatility in their share price around financial results – and greater vulnerability to perception risk. These factors provide a solid real-world rationale for working to shape investor expectations around financial performance in the near term – the next few quarters - as well as the long term.
While we completely agree that allocating capital and resources toward long term strategies and goals makes the most sense, as long as Wall Street gets to “vote” on our clients’ success in real time over 23,400 seconds of each trading day, 5 days per week and is not compensated based on a long term performance, we find it hard to counsel our clients to buy into his vision.
Instead, we believe companies should do an excellent job of explaining their vision, their goals and plans for the long term, as well as preparing investors for the consequences of those decisions in their near term results. The more helpful detail they provide, the greater comfort and confidence investors will have, and the more likely (not less likely) that investors will be motivated to hang on for the long run too. Though we set out to drive 2,000 miles to a distant city, does that mean that we must ignore the guideposts and gauge readings along the way that help us understand how we are doing in our journey and how well resourced we are to get there.
But kudos for at least raising the topic – as more and better longer term thinking and capital allocation will lead to better long term investment outcomes, which is good for all. But we are concerned his prominence might unduly influence companies to follow his lead, particularly those in the small or microcap realm - and find themselves in a worse position.
David C. Collins
Managing Director, Catalyst Global
New York City
February 9, 2016
Thursday, January 28, 2016
Thursday, October 15, 2015
We’ve provided some screen captures of Goldman, Sachs quarterly results reporting as it appears on TD Ameritrade this a.m. The same analysis can be performed on other financial portals to judge the success and efficacy of the alternative approach.
Clearly the financial community was poised for the report and the news flow was seemingly unimpeded by the change in disclosure methodology which eliminated paid wire service dissemination in favor of a website led disclosure supplemented by Twitter communications.
Note that in order to achieve broad instantaneous disclosure of its financial results outside of its website and Twitter activity, we have been told by reliable sources that Goldman provided its news release in advance to certain financial media, such as (we presume) Dow Jones, Reuters, Bloomberg etc. so that they could prepare the content and report it simultaneously with the web release.
A few cursory observations on how it went (from TD Ameritrade's news sources - example screen grabs provided below):
- In our observation, Goldman’s release appeared on their website at 7:35am ET – possibly 7:34am ET however, Dow Jones' headlines started reporting the results at 7:33am ET.
- From our observations, the Zack’s coverage, while it says 7:06am ET, did not appear prior to the Dow headlines and seems to have been “post dated” in its posting to
- None of the Goldman headlines on TD Ameritrade provide direct links to the full content of the Goldman release – whereas in the Q2 reporting cycle the full text of the release is accessible by clicking on a series of Dow Jones headlines.
- The absence of a broad, simultaneous distribution of the entire news release to financial portals such as TD Ameritrade remains our principal critique of the website-driven disclosure.
- Even the advance notification of certain major financial media such as Dow Jones did not achieve the same level of access to the source content (the actual release) as did Goldman's previous paid wire service distribution.
- Also, anecdotally, the first MarketWatch Clip today was at 7:40am ET vs. 7:37am ET for Q2 reporting.
Again, while we do appreciate the attempt to innovate, we do hold innovation to a standard of efficacy and relevance and for that reason we've gone out of our way to raise caution about this new approach for Companies considering it.
The analogy that comes to mind is that if we needed a document to "absolutely, positively" be somewhere the following morning, we would utilize one of the major overnight courier services, rather than to construct our own distribution channel of fast cars and fast drivers to achieve the same goal. It just does not seem that safety or efficacy were served in this experiment, but we welcome any evidence that in fact this is a far better idea.
The Catalyst Global Team
as Appeared on TD Ameritrade on October 15, 2015
Goldman Sachs Q2 Reporting Headlines From July 16th as appear today on TD Ameritrade (Release issued via a Newswire Service at 7:35 a.m. ET)
Looking at other disclosure sources we find the following issues:
Goldman's Q3 results are not listed in the Press Release section for Goldman on Bloomberg.com - not a terrible issue given that some coverage of the results appears on the website - but not an ideal result for 1/4ly results.
Similarly, on TD Ameritrade when searching on press releases, Goldman's Q3 results are nowhere to be found - again not a desirable outcome.
Goldman's Q3 results are discussed in a news item on Reuters but the full text of the results is not available on Reuters news page for Goldman.
Here's the news item attributed to Zacks but we don't believe was issued until after the release was posted to the website around 7:34 or 7:35 - it's time stamp of 7:06 am therefore appears to be incorrect. While not a major issue, it does raise a question as to the accuracy and reliability of data that gets reported and then consumed by investors.