The Da Vinci Code (Securities Analyst Version)

The job of a securities analyst has been likened to that of a person assembling a mosaic of information to come up with an investment thesis, or as I like to think of it, cracking a code. Indeed, the Securities and Exchange Commission, in their adoption of the final rules for Regulation Fair Disclosure stated:
“[A]n issuer is not prohibited from disclosing a non-material piece of information to an analyst, even if, unbeknownst to the issuer, that piece helps the analyst complete a ‘mosaic’ of information that, taken together, is material. …Analysts can provide a valuable service in sifting through and extracting information that would not be significant to the ordinary investor to reach material conclusions.”

While it’s nice to know that the Securities and Exchange Commission thinks that analysts can provide a valuable service, the key point here is the recognition that information comes from multiple sources. When you are involved in the corporate side of investor relations, as I was for over twenty years, you sometimes lose sight of this fact because you are striving to be the sole source of information not only on your company, but also on the industry. My mental picture of what analysts do, built up over a number of years, is that they talk to the companies under their coverage and in their industries, work on their models and come to an investment decision based upon that work. There seems to be precious little time devoted to alternate sources of information.

But, in fact, alternate sources of information have become ever more important since the adoption of Reg. FD. The reason for this is that corporate disclosures have become increasingly bland since the regulations came into effect in October of 2000. I can’t cite any statistic on this other than the fact that ever more lawyers have become involved in corporate disclosure. This point was driven home when, in an enforcement action in 2003, the SEC noted that Schering-Plough violated Reg. FD "through a combination of spoken language, tone, emphasis, and demeanor. In other words, you can’t look or act depressed when talking to investors. What corporate lawyers will tell you now is that unless things are on an even keel, it is dangerous to engage in one on one meetings and discussions with analysts. Of course, when things are not on an even keel is exactly when analysts want increased information flow.

Capitalism being the wonderful thing that it is, (and what’s more capitalistic than Wall Street?) the market has reacted to provide alternate sources of information for investors. There is a whole new sub-industry, the so-called expert networks that can get information about any company, product or trend you are looking at. There has been an increase in research shops that concentrate almost solely on channel checking with suppliers, customers, franchisees and, if they can get them to talk, employees. Of course, corporate investor relations officers dislike most of the alternative information sources because they can’t control the message and they often don’t know the source.

So what’s the best way to crack the code? If you are an analyst the thing to keep in mind is that when you talk to the company you will be told that the Mona Lisa is in fact a picture of a very nice lady. Because they answer questions about the picture all the time, they will be very good at describing everything in the picture that favors the company. They certainly won’t tell you where the code is hidden in the picture. Just as in the book, if you find information in the picture that indicates there is something more there than meets the eye, it will require considerable effort and multiple sources to figure the darn thing out. Oh, and the keepers of the picture won’t be happy with you, although it’s highly unlikely anyone will shoot at you.

If you are a corporate investor relations officer, the thing to keep in mind is that the more you stick to “the message” the more likely you are to drive your audience to alternate sources of information. There is room for nuance and difference of opinion about corporate performance. But, you have to admit; it is a very nice picture of a lady…