Investor Relations People Should Read This Book

Following Stephen McClellan’s speech at this year’s NIRI conference, I purchased a copy of his book, “Full of Bull”.  The book is replete with stories from McClellan’s 32-year career as a Sell Side analyst on Wall Street. His career pretty much covers the arc of Wall Street research, from lonely back office toilers in the 1970s to celebrated visionaries during the internet bubble in the late 1990s to everybody’s favorite whipping boys following the bursting of the bubble in 1999 - 2000.  This book should be required reading for anyone involved in investor relations.  While much of the book is devoted to advice for individual investors, there are certainly plenty of pointers for people on the corporate side to contemplate.

First, the book gives you a good feel for the daily grind and the rhythms and pressures of life as a Sell Side analyst.  This is important to investor relations officers because we often deal with managements that think research analysts sit in their office and think up annoying questions to ask on conference calls while occasionally moving numbers around a spreadsheet.  This is a tough occupation, with many masters, extreme time pressures and a grueling travel schedule, not to mention lots of people willing to tell you that you’re wrong.  In fact, my favorite joke about analysts goes as follows: “Q.  How can you tell the difference between a Sell Side analyst and a Buy Side analyst?  A.  The Sell Side analyst is the guy who has to wait until after he hangs up the phone before he calls the other person an idiot”.

Secondly, if you didn’t think about it a lot before, this book will absolutely convince you that the Sell Side analyst is beholding to the institutional clients, not the company.  The Company is a means to an end, information that will generate investment ideas that institutional investors will use to buy and sell stock, in the process paying commissions to the analyst’s firm.  In today’s environment where much emphasis is placed upon an analyst providing access to management, it is very easy for a company to feel that analysts and their firms are working for them when they set up non-deal road shows and group management meetings.  But they’re not – after all, it’s the commissions that pay the bills.  I had to learn this the hard way back in the early 1990s.  I was speaking at an industry conference sponsored by Salomon Brothers and was sitting in the audience between speakers.  As I sat there, I watched one of the senior equity analysts work the room, stopping and chatting with various portfolio managers and buy side analysts.  I knew this guy, having met him on a number of other occasions and I thought that when he got to my area he would say hello and thank me for coming.  After all, I did represent the leading company in our sector and was a speaker.  No such luck – I wasn’t paying the bills and there were far too many institutional clients to stroke for him to chat with me.  Maybe I’m just slow, but it took me a while to figure this out.  You can save yourself a lot of heartburn just by reading the book for this point alone.

Third, in his speech, Stephen McClellan referred to a 60%/40% rule he uses in assessing companies.  That is, 60% of the analysis of a company is based on the content of what they disclose, while 40% of his opinion of a company is formed by management’s credibility and behavior.  On the content side of the equation, I think some of the subheadings from the chapter “Evaluating Companies as Investments” are self explanatory as to his very practical thinking:

“Look for Stability and Consistency”

“Earnings Quality and Conservative Accounting Are Paramount”

“Healthy, Solid Balance Sheet is a Must”

If your company doesn’t have these qualities, you may have found an explanation for the stock price that never seems to get to where your management thinks it should.

Finally, on the management credibility and behavior side of the equation, McClellan makes the point that everything management does and says come under scrutiny.  (I couldn’t agree more with him on this point.)  He’s not just concerned with the prepared speeches and powerpoint presentations.  Of much more interest to him are the off-the-cuff remarks over a coffee break; the way managements interact with employees in the elevator and loading dock; how they dress and what the headquarters look like.  In short, does the culture match up with the stated goals of the company and does the company walk the talk.  Think about it – as much as 40% of an analyst’s perception of your company may be riding on unplanned banter and the perception of intangibles.  That alone may be enough to cause you to buy a copy of this book for your management.

The title of this book may be “Full of Bull” but the book certainly is not.  No matter if you are a novice or long-term veteran of the investor relations scene, you can profit from reading this book.

Investor Relations is Not a Passive Activity

You get the most amazing insights into companies from luncheon conversations.  Last week I was at the NIRI annual conference and I spent one lunch session chatting with Rick Hans, the investor relations officer of Walgreens.  I happen to have a passing familiarity with Walgreens, having spent 23 years of my career there, during 15 of which I was responsible for investor relations.  I still own a good sized slug of their stock.  I also know Rick Hans fairly well, as I hired him many years ago.  I like Rick and he’s is a good, smart guy, but in this instance I think he’s indicative of some of the failures many companies have when it comes to investor relations.  So Rick, if you’re reading this, my apologies, but it’s your turn in the penalty box.

The story goes like this - during the course of our conversation, I mentioned that I noticed that Jessica Spaly, the retail analyst for Capital Research, had been on a panel discussion on Monday morning and I asked Rick if he had spoken to her.    Rick’s response was “No, I don’t need to - I talk to her almost every day”.  I thought this was an interesting response given that Capital Research owns 77 million shares (7.8%) of Walgreens’ stock. Why would you ever pass up potential face time with a shareholder that important to your company?  Who knows, you might learn something about what they are thinking or you might continue to build a relationship with the analyst by showing that you were willing to go out of your way to say hello.  To do nothing to me is indicative of corporate hubris - you have to come to us, we won’t go to you.  I’ve known Jessica for about 5 years and I made a point of looking her up because I believe that investor relations is a profession build on relationships.   Capital Research certainly doesn’t own stock in my company, but the relationship is important to me,  During my very brief chat, I even got an indication of their thinking about Walgreens. My opinion is that investor relations officers need to be proactive about these opportunities - take every opportunity to get face time with your investors and build your relationships.

Later on in the same conversation, I asked Rick if he had seen the research note put out by Deborah Weinswig of Citi regarding a recent group meeting she hosted at Walgreens headquarters.  It was of interest to me as the first bullet point of the note stated: “Our Take — WAG is focused on five growth priorities, including: 1) protecting its core retail business;...”  The use of the word protecting was of particular interest to me as it sounds as if management is growing defensive regarding its retail store base.  If so, this would mark a significant shift from one of the premier growth companies around.  

Allow me to pause here and say that this is not your run-of-the-mill analyst.  Deborah has been a top rated analyst by Institutional Investor magazine for a number of years.  Institutional Investor rankings may not be perfect, but they are certainly indicative of an analyst having a following on the buy side.  When they write a note, it is worth paying attention to, as it goes out to a very wide audience of buy side analysts and portfolio managers.

What Rick said next stunned me, and I confess that as a result I am just a tad fuzzy on the details.  His comment was to the effect that he either hadn’t seen the research note, hadn’t read it or didn’t get Deborah’s research.  Take your pick, they’re all equally bad.  Regardless of how you feel about sell side research, you have to read it and know what they’re saying.  Not to do so is tantamount to not doing your homework.  Investors are going to read the research and form opinions about your company because of it, and you have to be ready to respond.  It’s part of the basic information gathering function of investor relations.

Maybe all of this could be forgiven if Walgreens stock price and P/E ratio were flying high.  Unfortunately, that’s not the case.  One year ago Walgreens stock was trading at $44.27, today it trades at $35.13, a decline of 20.6%.  The trailing twelve month P/E ratio has suffered even more, declining 26.4% from 22.7 to 16.7 during the same period. Obviously, when you get this type of decline in a stock price, something fundamental is going on, and Walgreens has struggled to control their expense ratios while they have expanded into “adjacent” businesses such as specialty pharmacy (see my blog post of October 8, 2007 for a more detailed discussion of their disclosures around this issue).  Investor relations alone won’t fix this issue, but is sure doesn’t help if you’re being passive in your approach to Wall Street.  When things are tough is exactly when you should be proactive.

Walgreens has just gone outside their organization to hire a new CFO, something that is extremely unusual in this company that believes strongly in promoting from within.  My sources tell me that one of the driving reasons they went outside the organization was because they needed someone who could talk to Wall Street, as none of the senior executives wanted to, or were particularly good at doing so.  Analysts that I’ve talked to who know the new CFO say he’s very good with the Street.  Maybe Walgreens is going to take a fresh approach to how they deal with investors.  I think they could use it.

Blogging and Investor Relations

Blogging seems to be on the minds of many practitioners of investor relations lately.  In the course of the last month, I’ve been on a Webinar on the topic, quoted in an investor relations newsletter, authored an article that will appear in an upcoming issue of NIRI’s IR Update and attended a breakout session on the topic at the NIRI 2008 annual conference.  In addition, blogging was specifically mentioned by John White, the Director of the Division of Corporate Finance of the SEC during his remarks at the opening session of the NIRI 2008 conference.

As one of the few people that are actually blogging about investor relations, all of this is grist for my mill, and I thought I would share a couple of thoughts about where I think all of this is heading.  I start with two premises: first, corporate IR bloggers are at an inherent disadvantage to individual bloggers such as myself, and two, there can be a useful, but limited role for corporate IR blogging in the future. 

First the disadvantages:  1.) Regulatory.  The aforementioned John White of the SEC in his address to NIRI members was quite specific in stating that anything corporations put on their blogs for viewing by the public is subject to the anti-fraud provisions of the securities laws, namely Rule 10b-5.  While this is not new news (he was just reiterating a previously stated position of the Commission), it certainly will prove to be an overhang to the development of blogs that provide meaningful information.  Most investor relations officers that I know are reluctant to answer analyst questions in email format for fear of creating a paper trail, so putting their thoughts in a blog on a public web site with the overhang of antifraud liability is almost beyond the pale.  Why would you do one more thing to create a public record that can be used against you when things go wrong?  

2.) Corporate.  Most corporations function collectively, with information and corporate positions passing through multiple layers of approvals, from the corporate communications department to the general counsel and numerous people in between.  This process means that every phrase is pondered, considered and revised.  The process also means that almost all of the individual’s voice is smoothed away, opinions are eliminated and certainly all of the humor is drained away.  The result is the bland pabulum served up in most corporate press releases - it’s just not very interesting stuff.  Blogging, on the other hand, is a solitary and somewhat spontaneous pursuit.  It is designed to express the individual’s view of events, unfiltered by the editing process (this can be good or bad, depending on who’s writing).  When I get an idea for a blog post, I sit down, write it and post it within a matter of hours.  Nobody reviews it, and my opinions, of which there are many, (hopefully) make the resulting article more interesting. 

3. Bureaucratic  When I sat in on the session on blogging at the NIRI conference, I was struck by the nature of the questions that attendees had.  The questions were not, “What sort of information do you include in your blog?” or “How do you make your blog interesting?” but rather, “Did you have to modify your disclosure policy to allow you to set up a blog?” and “What sort of approvals do you have to get before you post to your blog?”  This type of thinking is very prevalent in corporate America and especially in investor relations, where regulation and legal liability permeate everything.  Things have to be done by the book, with a system for everything.  It also means that for many companies, establishing and writing on a blog are not worth the hassle, unless and until they are dragged, kicking and screaming, into the blogosphere.  On the other hand, in the age of the internet, everyone with access to the web has his own printing press.  Individuals are much more nimble about what they can say, and how quickly it gets said.  It stands the whole system on its head, and size becomes a disadvantage for corporations, which simply cannot react as quickly as the collective individuals on the web.

With all of these disadvantages, where can corporate IR blogs be useful?  First, as restatements of the obvious.  In spite of what it sounds like, this is a useful function.  Much time in investor relations is taken up with answering obvious questions: industry position, product offering, company values and other important, but common matters.  With the decline in annual reports, the web site will increasingly become the source for this type of information.  Investor relations officers should take a proactive stance in writing about such matters.  Or, you can go brain dead and repeat the answers verbally 300 times per year. 

Secondly, as a reporting function.  Not everyone can make it to your analyst day or has the time to listen to 6 hours of webcasts.  Someone who can succinctly write about what you are presenting to the street can help you reach a larger audience.  This can be particularly helpful in reaching smaller money management shops and individual investors.  With the shrinking of the sell side, investor relation departments need to think of alternative ways to reach more of the buy side and also individual investors, and this is one potential way.

Finally, and probably more controversially, investor relations blogs should track and disclose the types of questions they are receiving from investors.  Almost every company has aspects of its operations that investors do not understand particularly well.  This can arise for a variety of reasons, but usually because the accounting in the area is complex or convoluted (think deferred taxes or pension accounting) or the company is doing something new and unusual.  If investors are constantly asking questions about the area, that in itself is important information.  To the company it’s important because it tells them they are not doing a good job on disclosure.  To investors it’s important because it gives them an idea about what other people on the street are thinking. 

 

I would write more, but my editor says its time for lunch… 

Report on the NIRI Conference

I’ve just returned from the annual National Investor Relations Institute Conference in San Diego and I think the slow down in the economy has affected investor relations.  I base this on three factors:  first, it just looked as if there were fewer people at the conference.  The yearly conference is always very well attended, so trying to gauge attendance by a visual impression can be somewhat difficult, similar to trying to guess Christmas sales by the size of the crowds in stores on Christmas eve, but to me, it felt as if there were fewer people at the event.  Secondly, my conversations with vendors in the exhibit hall seemed to confirm the downturn as the exhibitors uniformly told me that things were slower than in previous years and there were fewer exhibitors in attendance.  What really clinched it for me however, was the fact that there were significantly fewer of the free trinkets being given away by the exhibitors.  (Note: For those of you interested in retail, such items are referred to as tchotchkies, which is Yiddish, meaning a small object that is decorative rather than functional.)  When times are good, not only are there lots and lots of giveaways, but in addition, the exhibitors get really creative about their giveaways.  Last year’s flying screaming monkey stuffed animal comes to mind.  This year it seems as though the emphasis was on free pens and luggage tags with a few tee shirts and baseball hats thrown in.  Don’t get me wrong – I’m not complaining, and I’m as happy as the next person to pick up whatever they send my way.  I regularly supply my office and family with pens for a year from the conference.  But still, my dog really liked the screaming monkey…

 

The conference is too large and the breakout sessions too numerous for me to get to everything, but for me there were three interesting sessions.  First, there was a breakout session on blogging entitled “Is Your Company or IR Department Ready for a Blog?”  Naturally, this was of interest to me, although I sit on the other side of the fence.  I would venture to say that the corporate IR officers in that room, if they know about me at all, hope that I will never blog about them because I usually only write about companies after they have done something compellingly stupid.  Blogging is the topic du jour; in the past month I’ve participated in a Webinar, been to the NIRI session and been quoted in a newsletter on the effect of blogging.  In my next post I plan to write about blogging and corporate investor relations.

 

The highlight of the conference to me was the speech given by Stephen McClellan on Wednesday.  Stephen is the author of a recently published book, “Full of Bull” and a former Wall Street analyst for 32 years.  Judging from his remarks, he’s seen it all on Wall Street from the analyst point of view.  He focused his remarks on management credibility and things investor relations officers need to be aware of when dealing with analysts.  I was so impressed, I bought the book and will be writing more about what he said after I’ve had a chance to read the book.

 

Finally, Charlie Gasparino, from CNBC in a session entitled, “Wall Street: The Inside Scoop” dished out dirt on the goings-on in the heart of capitalism coming out of the Dick Grasso, NYSE, Elliott Spitzer affairs.  It was fascinating and I learned things I never would have dreamed of.  (For those not at the speech, do a Google search on Elliott Spitzer, black socks.)

 

Finally, I was gratified by the many people at the conference who told me they enjoyed this blog.  I will try and live up to your high expectations.  Also, as they say on Car Talk, feel free to express your gratitude on the back of a $20.00 bill …