Wednesday, April 18, 2007

Dealing with Know-it-all Management

Most analysts have encountered “Managementus Imperialis”, the member of company management who knows everything. Not only do they know everything, but they expect you, the analyst, to take everything at face value without further pesky questions. I don’t think this type of person knowingly sets out to mislead or frustrate the investment community. It is a somewhat drawn out and subtle process that gets them to the point where they believe that they are the fount of all wisdom regarding their company.

The process is self-selecting. Unless you are in a severely depressed industry, only optimists get promoted in corporate America. Being optimists, they naturally only look on the sunny side of the street. People who work for them recognize this and also tend to emphasize the good developments over the bad. This is compounded by people not wanting to argue with, or bring bad news to, their boss. By the time a person gets to a “C” level position in a major corporation in America, people have been saying yes to them for a very long period of time. From there it’s a small step to believing that if everyone says yes to your ideas, you must always be right.

My wife, who once practiced law in a large law firm, referred to this as “Partner’s Syndrome” – once a person made it up the greasy pole to partner, they assume that everything they say is right and shouldn’t be questioned. (My wife, much to her credit, has long since left the practice of law and now works as a pastry chef, doing what she loves.) I’ve seen it play out numerous times in investor disclosure. A member of management will make an assertion about a program, a plan or a fact and expect that to be the end of it. Who can forget “The seven breakaway strategies to grow sales” that were floated a few years back even though management refused to identify any of the strategies. Often there will be an assertion of fact about a trend that contains just enough truth to sound plausible, but upon closer examination doesn’t merit being called a broad based trend. Years back, I heard an assertion that “the primary drawing area of a store is a ½ mile radius”. I even repeated it myself many times. When I finally got around to checking the source for this statistic, I found that there was none other than the CEO’s gut instinct. By that time it was an industry standard.

So how does an analyst approach the problem, recognizing that management has a lot more facts about the business at their disposal than the analyst? My best advice is to remember that it is your job to question everything. If a statement is not backed up by hard facts, it’s an assertion, not a fact. To modify an old saying, “There are lies, damned lies, statistics and CEO facts”.

I would love to hear if other people have encountered this phenomenon.

Monday, April 2, 2007

What Kind of an Analyst Are You Dealing With?

What Kind of an Analyst are You Dealing With? (Part 2)

Today’s discussion of analysts relates to a type I refer to as “The Elephant Hunter”. This is a person who is searching for “the next big thing”, a killer investment idea that will overwhelm mere fundamental research.

The elephant hunter is really not interested in seriously looking at your company unless you have a reason to significantly stand out from the crowd. In a sense, this analyst is the ultimate believer in the efficient market – all pertinent information about your company to date, earnings, press releases, type and quality of your management, has been incorporated into your stock price. The only thing that matters is the very new, very different project that you are about to embark upon and that the analyst sees as a game changer. In other words, the elephant peeking out from behind the bushes. Only upon discovering this amazing new prospect will the analyst bestir themselves to change their opinion about you or recommend your company to their portfolio managers. They want to bag the big game, or to mix my metaphors, hit the home run by recognizing when the company is doing something new and different before anyone else does.

So what’s a poor IR person to do? (Except sing in a rock & roll band – oops, sorry, occasionally old rock lyrics will pop into my head.) Well, the first thing to do is to try and control your blood pressure. Just because earnings are up 15% is not enough to merit a change of opinion with this type of analyst. Then, see if there is a “hook” to your story. There has to be a hook for this person to get excited about. “Earnings are up because of good expense control” won’t do it. However, “Earnings are up because we installed industry leading software to better track and control our expenses which represents a quantum leap over the competition” might do the trick. Secondly, remember that elephants don’t happen along every day. If there is no big, new opportunity, then as they say in New York, “Fugetaboutit.”

Hope you enjoyed this piece. For all you analysts reading this, rest assured that in my next post I intend to take company managements to task by discussing the species, “Managentus Imperialis”.