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.