Sell Side Coverage, Part 2

A couple of weeks ago, I wrote about the relationship between Sell Side Coverage and a company’s ability to generate commissions. The long and the short of the article was that the sell side is paid via commissions and therefore, the more trading volume your stock has, the greater the likelihood a sell side analyst will cover your company. This is bad news if you are a small capitalization company, as the volume of commissions generated by your average daily trading volume will not make you a high probability candidate for coverage.

So if you are a small cap company, the question becomes, can you achieve any meaningful sell side coverage? The answer to this is yes, but like so much in life, in order to achieve your goal, you must be willing to spend a good deal of time and effort in order to get where you want to be.

There are a number of approaches to this, but in the end, they all come down to doing things that make you more attractive to the sell side. First, you can institute a marketing campaign to make your company more known to the sell side. This means reviewing who covers your peers and others in your industry and contacting them regarding your company’s investment thesis. While this alone is unlikely to result in sell side coverage, it does get you on the radar screen and raises your profile with the sell side. It also helps if you can present the sell side with a compelling reason to follow your company, such as a unique market niche, product or approach your company has that will enable the sell side analyst to be more knowledgeable about the industry than his competitors.

Second, you can make yourself more known to the sell side’s clients, the buy side. This involves the somewhat labor-intensive task of segmenting, targeting and positioning the company’s message to the buy side community followed by lots and lots of mostly fruitless phone calls. The result of this can be two things that will get the sell side’s interest: more trading in the stock and more questions about the company from the buy side. In this process it is wise not to ignore the IR officer’s anathema, hedge funds, as that is where a significant portion of today’s stock trading volume resides.

Next, you can make your management more accessible to the sell side. This may help sell side analysts fill in gaps in their knowledge about the industry and your company’s position in it, or may give them more product knowledge. As the sell side is expected to be experts in all aspects of the industry they cover, helping them gain more knowledge will put you on their radar screen. Additionally, doing a sell side analyst’s conference or using them to help arrange non-deal road shows allows them to show the buy side that they have management access, something they do get compensated for by the buy side.

One thing to keep in mind about this process is that it takes time and commitment from company management to raise the profile with the sell side. If a company has a dedicated investor relations officer and that person has a good working knowledge of how the Street operates, and the willingness to spend the time, then it can be done in-house. If, however, like many small cap companies, the CFO is filling the role of principle spokesperson to the Street, then it makes a lot of sense to hire an outside IR advisory firm to do the heavy lifting described above.

(Full and fair disclosure: the author is a consultant for Three Part Advisors, an investor relations strategic communications and consulting firm.)

The Relationship Between Sell Side Coverage and Commissions

Go to almost any gathering of investor relations officers and you are likely to hear them bemoaning the decline in the number of sell side analysts that follow their companies and publish earnings estimates. And if you are talking to small and even mid cap company IROs, you may hear them complaining that they are having trouble attracting sell side coverage at all. So I thought I would spend some time this week explaining why this might be so.

The answer is simple, really, and like many things in life, it boils down to “that’s the way the math works”. My children would always roll their eyes whenever I said that, so before I get to the quantitative part, a bit of historical perspective is in order. In the old days, before Elliott Spitzer, research departments received much of their budget funding from their bank’s investment banking departments and there was more coverage of companies because investment bankers wanted potential clients to get coverage from the firm. Of course, there were also quite a few conflicts of interest, as investment bankers only wanted the research department to have buys on potential clients. In addition, there was a lot of pressure from investment bankers for stock analysts to give generous recommendations to companies they were taking public. All of this culminated in the 1999 – 2000 dot com bubble when many highly touted internet company IPOs foundered on the shoals of reality.

Enter Elliott Spitzer, who, before he became Client 9, was Attorney General for the state of New York. Sensing that political hay was there to be made, Mr. Spitzer demanded that the conflicts of interest arising from the intersection of investment banking and research be eliminated. Using the bully pulpit of the Attorney General’s office, Mr. Spitzer was able to extract settlements from the investment banks that basically separated investment banking and research. No longer could investment banking departments contribute to the research budgets of their firms. In fact, investment bankers couldn’t even talk to research analysts unless an attorney was in the room to insure that no insidious conflicts reared their ugly heads.

This meant that research departments now needed to justify their existence based upon their only revenue source, which was commissions. And commission rates, due to a number of factors, were declining and continue to decline to this day.

This is where the math comes in, because for research departments, it all comes down to how many commission dollars covering your company can generate for their firm, and that in turn is heavily dependant on the average daily trading volume of the company in question. If you look at a mega-cap company such as Wal-Mart, they trade in excess of 14 million shares per day. Assuming an average institutional commission rate of $.04 per share, this means that on an average day, trading in Wal-Mart shares generates $560,000 in commissions. Even if you are a mid-tier analyst covering Wal-Mart, and you figure you can get credit for 5% of the commission flow, this means that potentially you have available to your firm $28,000 per day.

On the other hand, a small cap stock with average daily trading volume of 100,000 shares, generates commissions of $4,000 per day. Even if you figure the very top, go-to analyst on the stock can get credit for 25% of the commissions, the potential dollars available total $1,000 per day.

Wall Street firms are economically rational, and they will naturally gravitate to where the most money is to be made. And the long and the short of it is that it is a lot better to be a middle of the pack analyst following a mega cap stock than it is to be the number one analyst following a small cap stock.

So the next time you hear someone bemoan lack of sell side coverage, ask them what their daily trading volume is.

Because that’s the way the math works.

Insider Trading – The More Things Change…

There’s an old French proverb, “plus ça change, plus c’est la même chose”, which translates into “the more things change, the more they stay the same” and that’s the way I feel about insider trading. Every few years, the topic seems to rear its ugly head long enough for prosecutors to make some headlines before moving on to other offenses.

In the past few weeks insider trading has come back into the news. Federal prosecutors recently unveiled a sweeping investigation centered upon the use of so called “expert networks” and involving subpoenas to SAC Capital, Janus Mutual funds, Fidelity Investments and Wellington Management. The current round follows about a year after the indictments announced in connection with the investigation of Galleon Hedge Fund and there appear to be a number of links between the two cases.

Insider trading issues are always going to be part of Wall Street as there is an inherent conflict of interests between our regulatory scheme and what motivates professional investors. The regulations seek to ensure fair and honest markets where all investors play on an even field. On the other hand, investors seek to gain an “investment edge” either through superior analysis or by figuring out insights to what may be happening at the company in question by piecing together disparate snippets of information. Given that there are significant amounts of money involved, Wall Street analysts are always going to push as hard as they can to gain an investment edge, up to, and sometimes over, the ethical line.

It doesn’t help matters that the current regulations and case law regarding insider information are not crystal clear. To greatly oversimplify things: If you are in possession of material, nonpublic information and you received it as a result of a duty to the corporation, or from someone who has such a duty, or if you have misappropriated the information in violation of a fiduciary duty, you can’t buy or sell the securities of that company. However, the mosaic theory, first enunciated by the federal courts in Elkind v. Liggitt & Myers, Inc., holds that analysts can assemble seemingly disparate non-material information into a material piece of information; that is, information that leads to a decision to buy or sell the stock. Of course, if some of the mosaic of information was obtained as a result of violations of duty to the company discussed above, things become somewhat less clear.

And there we have what I believe to be the crux of the current crop of insider trading cases. If you listen to the defendant’s attorneys you hear a constant drumbeat of mosaic this and mosaic that, portraying their clients as simple analysts who gain insight into companies by dint of digging harder than anyone else. If you listen to the prosecutors, what you hear is a tale of misappropriation of information that was known to be from sources that had a duty not to disclose the information, even if the piece of information was not material in and of itself. To my knowledge, there is no clear case law that governs in such a situation. Judges and juries are going to have to figure this one out, followed by inevitable appeals.

If we’re lucky, there eventually may be some clarifying language that will help people understand what they can and cannot do - what lawyers like to refer to as a “bright line” test. If we’re really lucky, the courts will give it a handy catch phrase such as “fruit of the poisonous tree” or “clean hands doctrine” that will help investors know what they can and cannot do.

Goodness knows, the securities laws could use some simple, clear rules that everyone can understand.

What Motivates Your Analyst?

The United States Court of Appeals for the Second Circuit once characterized the exchange of information between corporations and investment analysts as “a fencing match conducted on a tightrope”. If investor relations officers are going to be successful in such a treacherous environment, it helps to understand the analyst on the other side of the conversation and what motivates them. Different analysts have different approaches, and early on in this blog I wrote about “information vampires” (March 2007), “elephant hunters” (April 2007), and “channel checkers” (July 2007) as prime examples of the way some analysts approach things. Now comes a New York Times article published on September 12, 2010, entitled “The Loneliest Analyst” about Richard Bove, a banking analyst that offers some good insights about the way another type of analyst works.

The bulk of the article concerns the lawsuit brought by BankAtlantic, a Florida bank, against Bove for a report he issued about the banking industry in 2008, which ranked the bank’s holding company as among the most risky financial institutions based on financial ratios. The lawsuit was eventually settled without liability to Bove, but it left him the poorer by $800,000 in legal fees. While the drama surrounding the lawsuit is interesting to anyone who has ever listened to a CEO fume about what he thinks is unfair or inaccurate in an analyst’s report, the more interesting part of the article occurs when Bove speaks about his work.

The lead in the article talks about how Bove likes to take “extreme positions” which can occasionally move the markets, gaining him prestige and notoriety. It then cites as an example a recent opinion issued by Bove that government rules would curb mortgage profits and by implication, bank profits. When the share price of Wells Fargo, a large mortgage lender, begin to drop following the report, Mr. Bove’s phone lights up with calls and he states, “That’s what makes the game fun, right?”

According to the article, Bove’s work tends to focus on the big picture, because, as he puts it, “What’s the reason to pay me to be the 14^th guy to tell you what is going to happen in the second quarter at Citigroup? There’s just no utility for a guy at a boutique that operates pretty much on his own to replicate the work of other analysts.”

So one of the takeaways from the article come from learning that analysts at boutique firms may have an entirely different motivation in how they approach research. Without the resources of some of the bigger shops, their focus may be on hitting the home run as opposed to maintenance research, or on big picture, macro stories. Understanding if the analyst you are speaking with takes a differentiated approach will help you as an investor relations officer have a more meaningful discussion with that analyst.

In another interesting portion of the article, Andy Kessler, a former Wall Street analyst, is quoted as saying that it’s common for analysts to change their opinion styles in order to cater to their clients: “If your clients are mostly hedge funds, you’re going to give mostly short-term analysis”. Given that a large percentage of trading volume these days comes from hedge funds, it’s no wonder that we get mostly short-term analysis.

So two quick takeaways from the article: understand what motivates the analyst, and know who his clients are will help you understand his research approach. Sounds a lot like the old broker rule of “Know your client”, but this time reversed.

Reg. FD and the Law of Unintended Consequences

It used to be in the good old days (some would say bad old days) stock analysts saw a goodly percentage of their job as talking to and cultivating relationships with management. The classic example of this is the analyst I refer to as the “Information Vampire” who would talk to management until they felt they had sucked every last drop of information from them. The thought process was that by building a relationship, the analyst would pick up enough tidbits of information to give them an advantage over the average investor, and because management liked them, they might let the analyst know something important before everyone else, either in a one on one meeting or by being the first phone call they made when news is breaking. On such things careers were built on Wall Street.

Then along came Regulation Fair Disclosure, in which the SEC mandated that if a company is going to say something important, it has to tell everyone at the same time. It doesn’t matter if you are best buddies with the analyst who has followed you through thick or thin or if a portfolio manager had been a loyal shareholder for many years. The reasoning was that the securities markets need to appear to be a level playing field for all concerned, regardless of whether you are a professional money manager with $50 trillion in assets or you are a retail investor looking to buy 100 shares of stock. (This is very much the same type of governmental thinking that gave us the Robinson-Patman Act prohibiting price discrimination between customers, but that’s a subject for another day.) The SEC then proceeded to announce a series of enforcement actions to drive home the point that you can’t just go off and blab to institutional investors. They never actually won a court case on the subject, but they made their point and companies toed the Reg. FD line.

This, of course, did not stop Wall Street’s desire for an information edge. We are, after all, talking about an industry with serious amounts of money at stake. It just meant that the quest for information went elsewhere. Hence today, courtesy of Reg. FD, we have at least two new types of information hunters on the scene.

The first of these is the “Channel Checker”. This is a person who specializes in cultivating a network of industry sources, be they lower level employees of the company, suppliers, customers and competitors. They usually don’t talk to the company very much, if at all. This type of analyst has always been around, but since the advent of Reg. FD have increased in number as they try to supply investors with they type of information edge they can no longer get from the company.

The second type of information provider that has gained more prominence since Reg. FD has been the expert network systems. These are organizations that have created data bases of people with expert knowledge on particular subjects. Then, when an investor needs to get up to speed quickly on a subject, whether it’s current inflationary trends in the footware industry in China or the likelihood of a drug getting through the FDA approval process, there is someone out there, that for a fee, will expound on the subject. (Disclosure: On occasions, I have been retained by expert networks to discuss things about which I have knowledge.)

Companies, of course, don’t like either one of these developments, as they can’t control the information being disclosed or put any spin on the story. In and of themselves, the channel checkers and expert networks are not a bad thing, they are just different sources of information. It’s just that the SEC shouldn’t kid themselves into thinking that Reg. FD has made the information the same for everybody. It just means that professional investors have to redirect their efforts as to how they get it and how they pay for it.

And You Thought Our Stock Ratings System Was Screwed Up

In the February 8^th Sunday New York Times, the Business section contained an article entitled “Why Analysts Keep Telling Investors to Buy”.  It’s worth a read, even if it covers familiar ground to those experienced in the ways of Wall Street and investment analysts.  The long and the short of the article is that even in the mist of a terrible bear market, analysts still only have sell ratings on 5.9% of all stocks.  Having missed all of the warning signs for the current economic downturn, most analysts are now of the opinion that stock prices are so low that now is the time to buy.  Nobody wants to issue a sell rating just when the markets turn up.

I’ve written about this phenomenon before (see “Stock Ratings from Lake Wobegone”, May 15, 2008).  Leaving aside the tendency of the stock market to rise over time, all of the incentives on Wall Street favor the optimistic, bullish view.  When an analyst issues a sell rating, companies hate him, investment bankers hate him and commission flow goes elsewhere.  The only ones who like sell ratings are short sellers, and they are often viewed as the pariahs of the industry, commonly blamed for all sorts of financial misdeeds and shenanigans.  (My own feeling is that short sellers, like jackals and hyenas, form a natural part of the ecosystem, but that doesn’t mean we have to like them.)

None of this would be worthy of a lot of additional comment on my part, except that about the same time as I read The New York Times article, I also ran across a brief piece in the February 7^th issue of The Economist magazine that made me think that maybe, as skewed as things are here, they’re a lot better than some other markets.  The article, entitled “Bye bye sell” takes a look at research recommendations in the South Korean and Taiwan markets.  In both markets it appears that government regulators actively discourage brokerage firms from issuing critical research.  In South Korea, the Financial Supervisory Service has been known to investigate brokerage firms that issue critical research, while in Taiwan, if the press quotes critical research, the government requests brokers to provide “explanations” as the press is required to receive a securities firm’s approval before quoting research.

The results are predictable, as the research firms quickly learn that critical research brings more trouble than it’s worth.  For example, during 2008, there were 17,335 research reports issued in South Korea, and not a single one was a sell recommendation.  This is not what you think of when you start talking about efficient markets.  As bad as our distribution of stock recommendations is in the U. S. we are not burdened by a government bureaucracy that views stock markets as an instrument of optimistic government policy. Yet.  

The Curious Effect of Falling Stock Prices on Diluted EPS

As I’ve watched companies report earnings for the quarter that ended September 30^th, I’ve noticed a strange phenomenon – companies are getting help to their Diluted Earnings Per Share line from falling stock prices.  It’s no secret that the stock market has been brutal over the course of the past six months, and company equity values have taken a beating.  But there has been one small side benefit to the decline in stock prices.  Of course, companies won’t come out and tell you what it is.  You have to be a pretty savvy investor and know your way around a company’s financials in order to figure it out. 

Here’s how it works:  many companies have issued a large number of options over the last decade and have a large number of options that go into the diluted earnings per share calculation.  To grossly oversimplify things, the more options a company has outstanding and the deeper they are in the money, the greater the number of shares in the denominator for purposes of calculating diluted (as opposed to basic) earnings per share.  So far, so good, as long as the stock price moves in a smooth fashion.  However, when you get a steep drop in the stock price, many of a company’s options go under water.  When an option’s exercise price is above the fair market value of the stock, the options are excluded from the diluted earnings per share calculation, and they are anti-dilutive.  (This sounds to me suspiciously like anti-matter, but I don’t think accountants are that imaginative.) The result is that companies with large numbers of stock options and steep price drops in the stock price wind up with fewer fully diluted shares in their diluted EPS calculation and hence a higher diluted EPS number.  Good luck getting them to fess up to that however, they do their best to bury the calculations deep in the 10K or 10Q.

Sometimes the numbers can be startling.  A few years back Microsoft had 649 million shares excluded from the calculation of diluted EPS because they were anti-dilutive.  Talk about a big overhang on EPS if the stock price ever recovers.  More usually, the anti-dilutive effect is smaller, say one or two cents per share in each quarter.  The point here is two-fold: first, in Wall Street’s eyes, one or two pennies per share per quarter is a lot; when companies miss by that much, they get punished; and second, this is a non-operational benefit that companies are getting due to the bear market.  Companies are quick to tell you when non-operational issues hurt the EPS line, so why do they stay so quiet when it runs in their favor?

Finally, as long as I’m on my soapbox, where have all the highly paid Wall Street analysts been on this issue?  I have not seen a single analyst report that mentions this.  So here’s some advice to all my sell side friends – when diluted and basic EPS suddenly start looking the same where in previous years diluted was lower than basic, the company is probably getting some non-operational help from anti-dilutive options. Things aren’t as good as they seem.

Now, just like anti-matter coming into contact with matter, I will disappear.

How to Read 10K and 10Q Reports

The Annual and Quarterly Reports on Forms 10K and 10Q are documents that come under the heading, “Important, but boring”.  If you are an investor trying to read one of these things, it’s equivalent to drinking a glass of warm milk just before bedtime.  It’s guaranteed to induce drowsiness.  And that’s just the way companies want it.  These things are written by teams of accountants and lawyers, whose job it is to comply with the law and regulations set out by the SEC and the courts, while saying as little as possible.  While the SEC may mandate the use of “plain English”, there is no obligation to make the language interesting.  It is yet another example of the focus of our corporate disclosure system on complying with regulation rather than attempting to clearly state what is going on. 

Yet there’s lot of good information in there, if you can persist and find a way to dig it up.  The tricky bit is that often the interesting information is what’s changed from what they used to say or what is no longer being said.  And that’s hard to figure out.  If you are a sell side analyst who has intimate familiarity with the company filing the report, things that are not being said may instantly pop up at you, but for the rest of us, remembering what is not there, but should be, or what has been subtly changed, is a much more difficult task.  As I thought about this it occurred to me that these reports are rather lengthy documents, which no one could write from scratch every quarter.  What the writers of these documents do is take last year’s document from the same time period and mark it up for changes.  Certain things have to get changed – after all, the numbers aren’t going to stay the same every year; but other changes give you some insights into what the company may not be saying and how they view their disclosure obligations.

So the thing to do is to lay out this year’s and last year’s report side by side and work your way through the important sections.  Just to take an example, I looked at CVS, the large drugstore chain.  Picking a subject at random, I went to see how many pharmacists they have on staff, as it might be an important indicator of service levels.  Here’s what I found:

2007 10K

“As of December 29, 2007, we employed approximately 200,000 associates, which included more than 20,000 pharmacists…” 

In and of itself, this snippet of information doesn’t tell me a whole lot – if you combine it with the number of stores they had open at the end of the year, 6,301, you have a ratio of 3.17 pharmacists for every store.  So I laid it next to what they said the previous year:

2006 10K

“As of December 30, 2006, we employed approximately 176,000 associates; of which approximately 20,000 were pharmacists…”

Now things start to get interesting – did CVS really add 24,000 new employees but no net new pharmacists?  Or are they hiding behind the weasel words “more than 20,000” in 2007 versus “approximately 20,000” in 2006.  Further digging showed that CVS completed a big merger with Caremark in 2007, so they could have added a significant number of employees, but they also added 99 net new stores from 2006, so the ratio of pharmacists to stores fell from 3.22 in 2006 to 3.17 in 2007.  Just to maintain the same ratio of pharmacists to stores in 2007, CVS would have had to add 318 pharmacists.  Furthermore, the old Caremark was a pharmacy services provider, so presumably they had pharmacists on staff that transferred over to the new combined CVS. 

So what does this tell me as an investor about CVS?  It sure raises a lot of questions, none of which CVS tries real hard to answer in their filings, to wit:

1.  Did CVS reduce service hours and staffing for pharmacists in their stores?  Have they suddenly gotten more efficient?  Were 2006 staffing levels too high?

2. Is CVS having trouble hiring enough pharmacists?  This was an issue with them several years ago, causing a decline in earnings and should therefore be of interest to current investors.  It might even rise to the level of what an investor would consider important in making an investment decision about their stock.

3.  Why doesn’t CVS use exact numbers when describing how many pharmacists they employ? Can’t CVS be bothered?  Or is it that their systems aren’t good enough?  You would think they would have records and systems that tell them, especially at yearend.

4.  Does the use of weasel language such as “more than” and “approximately” about a key type of employee make you nervous?

5.  Where are all the pharmacists from Caremark?

6.  Should an investor start to look at other numbers CVS uses to see if they tie out?

The drafting of an Annual Report on Form 10K passes through many hands in a large corporation, from the internal accountants, internal securities law lawyer, investor relations personnel, outside securities law lawyers, the General Counsel, senior executives and the Disclosure Committee.  When you see a change such as the one above, you have to conclude that there was a deliberate choice to be vague on the topic and hope nobody would notice.

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 …

Stock Ratings from Lake Wobegon

Today’s New York Times reports that Merrill Lynch unveiled a new rating system that requires their equity analysts to assign “Underperform” ratings to 20 percent of the stocks they cover.  As a lead-in to the article, the authors refer to the Lake Wobegon quality of stock ratings – most stocks are rated above average.  (For those of you who are not familiar with Lake Wobegon, it is the fictional town in Minnesota featured in Garrison Keillor’s Prairie Home Companion radio show.  Each week Garrison Keillor reports the “News from Lake Wobegon” and finishes with the tag line, “That’s the news from Lake Wobegon, where all the women are strong, the men are good looking and all of the children are above average”.)  The article goes on to cite Bloomberg data to the effect that only about 5 percent of all stock recommendations on Wall Street fall into the “Sell/Underperform” category.

 

Now, I could have a lot of fun with this, as clearly, far more than 5 percent of all stocks are going to underperform.  Even if you throw in a “Neutral” category, a normalized distribution would require far more than 5 percent “Underperforms”, even adjusting for the market’s tendency to rise over time.  But that would be too easy.  So what I want to do is examine the reasons “Outperform/Buy” so dominate the world of stock ratings and “Underperform/Sell” is so rarely seen.  After all, it’s not like all these MBAs suddenly become Pollyannas when they get assigned to equity research.  This is Wall Street we’re talking about here, so cynicism is not in short supply.  Clearly, a different set of incentives is at work.

 

Quite simply, if an analyst puts a sell on a company stock, the company hates him, the long only investors that currently own the stock hate him, the long only investors that don’t own the stock aren’t going to buy it, and the firm’s investment bankers get really mad at him.  Only the short sellers will like the sell rating.

 

Understandably, if a company receives a sell rating from an analyst, they don’t like it.  Ratings changes can occur for a variety of reasons – valuation, fundamentals, sector or industry changes; but companies usually don’t care.  A common reaction by companies is to cut analysts off from corporate access.  Much as we like to think that analysts are engaged in independent research, much of their information surrounding formal disclosure comes from talking to the investor relations contact at the company.  Cut off this flow of information and deciphering the balance sheet and cash flow statements becomes much more difficult.  The analyst will also find that the probability of their being able to ask a question early in a company conference call is remote.  Companies control the order of the question queue and they are not going to feature an analyst with a sell rating as the first questioner on the call.

 

Further, much of what the Buy Side values from the Sell Side these days is access to management.  Just try arranging a trip to company headquarters for your clients if you have a sell on the stock.  If you’re an investor relations officer with more requests for meetings than you can handle, think about trying to convince your management to take a meeting for someone who has a sell on the stock – the same person whose name your CEO mentions only in combination with an expletive.  There are better ways to spend your day. 

 

As to the Buy Side of the equation, if a firm owns a stock, they’ve made a commitment to it and have often invested a lot of research in it (not to mention that they often become emotionally attached to it as well).  Then along comes a Sell Side analyst and tells them they’re wrong.  The Sell rating may have already caused the stock to decline, plus he’s making either the Buy Side analyst, the portfolio manager, or both, look bad.  This is a situation that can cause conflict and strife.  Plus the commission flow from the Buy Side firm is likely to decline because they're mad at the analyst, which will antagonize the Sell Side firm's sales force and trading desk.

 

Finally, investment bankers really don’t like it when they’ve invested weeks, months or years trying to build a relationship with a company, only to have an analyst rain their parade by putting a sell on the company stock.  There may be a theoretical Chinese wall between investment banking and research, but don’t think that company managements give a hoot about that.  A sell rating stands a good chance of tainting the whole firm, thus jeopardizing all those juicy M&A and underwriting fees.

 

Is it any wonder there are so few sell ratings?  The incentives are all going the other way.  It’s just too painful to put out a sell rating, which is why you usually see them only after the stock has already collapsed or on companies that are small and don’t command much respect when it comes to fee generating abilities.

 

I’ve been thinking about alternatives to the way stocks are rated, but I’m going to save it for another post.  I’ve got to go – my broker just called with a great buy rated stock

Starbucks’ Grande Mistake

Yesterday Starbucks announced its first quarter results, a 2% gain over the same period a year ago.  This is a weak performance by Starbucks’ standards and was accompanied by a number of announcements regarding initiatives to turn Starbucks back into the Starbucks that people used to love.  What caught my eye, however, was the simultaneous announcement that Starbucks was now longer going to provide same-store sales numbers.  I think this is a grande mistake on the part of the company.

 

Now, for those of you who do not immediately see the impact of this, allow me to enlighten you.  I worked in the retail sector for 23 years at Walgreens and for 15 of those years I was responsible for their investor relations.  Walgreens released same-store sales on a monthly basis so that means that I went through about 180 monthly cycles of releasing sales numbers.  I can tell you that same-store sales are the most closely watched indicator in the retail arena.  The numbers help investors figure out if you are growing in your more mature stores and how successful your merchandising initiatives are.  And while everyone knows that one month’s sales do not necessarily set out a trend, a series of same-store sales numbers will certainly help people understand where the business is going.

 

So, just when things are going bad, Starbucks has decided to communicate less.  I don’t agree with what they are doing, so I took a careful look at the reasons they set forth for their actions, as reported in The New York Times and The Wall Street Journal.  (I find that I need to read both newspapers to get a balanced view of the world – one pulls you to the left and then the other pulls you to the right, so you wind up in the middle.)  What I found were two justifications for the decline in communications.  First, they said that a focus on increasing same-store sales is part of what led them away from their core strategy of creating a Starbucks experience, and second, same-store sales numbers would be “erratic” during the transformation.

 

Frankly, in financial terms, this is a lot of baloney.  The reason the Starbucks experience changed is that they stopped acting like a neighborhood coffee shop with a focus on coffee and started acting like a chain restaurant.  Everything became standardized, with a focus on cutting wait times and controlling the process.  This worked when the economy was robust and there was little competition, but things are tougher now. 

 

As to the second reason, Starbucks was happy to report same-store sales as long as they were robust, giving people the impression that they were going to grow to the moon.  Now, when same-store sales might be erratic, analysts can no longer be relied upon to draw the proper conclusions (read: conclusions that are favorable to Starbucks).  It doesn’t work that way.  You can’t close the curtains on the wizard.  If Starbucks thinks that they are going to enter a period of erratic same-store sales because of the transformation they are attempting, they should be prepared to explain to investors what they are doing, the impact it has on sales and how they believe it will improve sales in the long run.  That’s part of being a public company.  To put it into consultant speak, where performance plus perception equals stock price, Starbucks is cutting off an important component of the performance portion of the equation, which will throw into doubt investors’ perceptions of the company.

 

I think Starbucks is a terrific company, one of the great growth stories of the past 20 years.  I’ve been to one of their analyst days and I am convinced that they are one of the best marketing companies around.  They sure know how to sell the romance of a cup of coffee, creating a premium product out of what was once considered a commodity.  I just think they’re dead wrong on this issue.  I’ve seen the “No Same-Store Sales Numbers” movie before, Home Depot version, and it did not have a happy ending.

How Not to Run a Conference Call

Yesterday Al Lord, the CEO of SLM Corporation (Sallie Mae) held a conference call to reintroduce himself to the analyst community (He had previously served as SLM’s CEO and CFO). The purported purpose of the call was to bring some transparency to his role as CEO and to talk about some broad issues and goals for SLM. He certainly brought transparency to his role as CEO. What the Street saw was an executive who was by turns vague, defensive, arrogant and profane. Investors’ reactions were what you might expect – the stock traded down 20%, the worst one-day drop in the company’s history. As this is an example that we can all learn from, I thought I would dissect the call in more detail for our edification.

There were many issues that needed to be addressed on the call – a failed buyout bid and ensuing litigation, lowered credit ratings and the need to shore up capital at the company, the CEO’s recent sale of 1.2 million shares and steps needed to return the company to a growth mode following the nine months the failed buyout bid was pending. To the CEO’s credit, he raised all the issues in his prepared remarks. Unfortunately, he didn’t clearly explain any of the issues or set out concrete steps to achieve his goals. Then he acted surprised and defensive when during the Q & A session analysts tried to get a bit more specificity out of him.

Take for example, the issue of shoring up capital. According to the transcript, Al Lord said: “My goal, first goal, probably my first goal and second goal, is to strengthen our balance sheet. The deal, the unfinished deal, cost us a single-A rating. We're now BBB. First objective is to solidify that BBB, next goal is to improve it from BBB to single-A. It is very much my first priority. In order to do that, obviously, we're going to add capital …” There was nothing said about how capital was going to be added. Predictably, the first question during the Q & A session was about how the capital was going to be raised. Here’s a portion of the exchange:

Analyst: “I wanted to ask -- you're going to shore up the balance sheet. Does that mean you're going to be selling equity?”
Al Lord: “The most preferred type of equity is common equity. At this point, I'm not going to get very precise with you. The idea is to strengthen the equity, the capital count with financing somewhere beneath the long-term credit line.”
Analyst: “Do you think you would need to raise to get back to the credit rating you would like? And what are your thoughts about the dividend?”
Al Lord: “This is the last question I answer that's more than one part. We will look at the dividend in the second half of the year.”
Analyst: “Okay. And you didn't mention how much equity you were going to need to get back up to the single-A rating.”
Al Lord: “You're talking to the wrong guy. I don't know that answer.”

This exchange is a microcosm of what went wrong with the call. The first answer is vague and indirect. A simple yes would have sufficed, as the answer seems to imply that SLM will be selling equity and would prefer to sell common equity. The answer to the last question is simply a stunner in its arrogance. Here the CEO has stated that his first (and second) priority is to add capital, yet he can’t be bothered with the details. This guy used to be the CFO, so it’s not as if he came out of sales and marketing and doesn’t know his way around a balance sheet. This is not the way to inspire confidence in the market place. There are lots of ways to answer that question without giving specifics, such as “We’ve just started studying the issue, so we’re not prepared to comment on exact amounts yet”, or “There as so many variables that can come into play as we work to improve our capital structure that it would be premature to comment on amounts of equity required just yet.”

I could go on, as there are plenty of other examples of what not to do in a conference call, from failed humor to profanity, but it’s a bit like shooting ducks in a barrel – it’s way too easy, and besides, this post would be too long. The fact that the market removed $3 billion from SLM’s market cap probably says more than I can.

So, it makes for great theater, but what can we learn from the call? Here are a few thoughts:
1. Broad, rambling statements of goals don’t cut it with an audience of equity analysts. These are people whose job is to parse the details to construct models of future earnings. General statements coupled with a refusal to go into specifics will drive them nuts. If you can’t be clear and concise, it’s better not to say anything at all.

2. Tone, attitude and preparation matter. Al Lord clearly did not want to answer questions from pesky analysts and wasn’t prepared. This sends a message that he doesn’t care about his investors and is a shoot from the hip sort of executive.

3. Never, ever, use an expletive on a conference call. Before this, Jeff Skilling of Enron fame held the award for dumbest thing ever said on a conference call when he called an analyst a particular body part. Al Lord has clearly taken the award from Skilling, by ending his conference call with “let’s get the [expletive] out of here.”

On that note, I will get the heck out of here.

Road Shows and Hedge Funds

I had the pleasure last week of attending a meeting of The Conference Board’s Global Council of Investor Relations Executives. It is an organization I used to belong to when I was on the corporate side of the equation and I think they do a good job of focusing on areas of concern for large cap corporations. The meetings are a great opportunity to hear what your peers are working on, network and listen to some interesting presentations. It is in this latter role that I was attending, having arranged to have Christopher Middleton, CEO of Atlantic Equities, discuss the merits of European roadshows for U.S. companies. Atlantic Equities is the only European based sell side shop covering U.S. equities exclusively and as a result each year they also wind up arranging a fair number of European roadshows for U.S. companies. Chris did a great job laying out the rationale for going to Europe, and every large and mid cap U. S. company should give thought to visiting with European investors as a way of broadening their shareholder base and getting away from the hedge fund merry go round that so many U.S. roadshows have turned into. (Disclosure note: the author has a relationship with Atlantic Equities and therefore is not an entirely disinterested observer.)

All of this prompted me to start thinking about why it has become such a fight to see long only investors on U. S. roadshows lately. After a moderate amount of thought (you don’t want to overdo these things), my thesis is as follows: 1. The funding for sell side research has changed, 2. You (the company) are not the client of the sell side, and 3. Follow the money.

1. The funding for sell side research has changed. It used to be that investment banking paid for much of the budget of sell side research departments. When that was happening, there was every incentive for the research analyst to maintain a good relationship with the potential investment banking client and to help facilitate meetings with the type of investors the company wants to see – long only, low turnover investors. If it didn’t result in many shares being bought or sold, well, investment banking was picking up the tab, and commission structures were higher then. Of course, Elliot Spitzer has changed all that and eliminated the inherent conflicts of interest. He’s also eliminated a strong incentive for sell side analysts to help you see the kind of investors you want to see.

2. The Company is not the client of the sell side. I think corporate IR officers often lose sight of this one. The sell side has placed more emphasis than ever before on getting management access for the buy side. The major sell side shops have entire departments that can set up road shows for you, soup to nuts, on very short notice, with only a phone call from you. As a result it feels as if you are their client. After all, they’re doing all this nice stuff for you and eliminating a major administrative headache. But you, the company, are not the client, but merely a means to an end. That end is commission flow, coming from the true client, the buy side.

3. Follow the money. Today, sell side research budgets are heavily dependant upon commission flow. And because commission rates keep falling, the most important clients of the sell side are the ones that trade the most – the hedge funds. Think about it this way – if you are visiting a city for one day, you have at most, 6 one hour time slots to see investors. When the analyst and the sales desk start to talk about which investors to see, their interest is in making their 6 biggest commission generating clients happy. You might have a top 20 investor in the city that has held the stock forever, but if they don’t generate a lot of commissions they won’t be getting a call from the sell side unless you insist upon it.

So what’s a poor investor relations officer to do? There are some things that a company can do to that can make things work for both sides. First, know the investors you clearly want to see on any give roadshow, especially if they are existing shareholders, and make your desires known at the outset. Second, recognize that the sell side will have some clients they will want you to see, and reach a happy medium. Remember, the sell side is not going to the trouble to arrange the roadshow for you without the expectation of some form of compensation, which is coming from the buy side. Third, pray that the hedge funds you do agree to see do not include the obnoxious, 30 year old who thinks he can tell your CEO how run the company.

Or, alternatively, you can go to Europe, where there are far fewer hedge funds. (For more on this topic, see my article in the September, 2007 National Investor Relations Institute Update magazine entitled “Things to Consider When Contemplating a European Investor Relations Roadshow”.)

The Road Show Blues

Last week’s post about the essential life skills of the investor relations professional put me in mind of roadshows, another of the great travails of anyone who has to speak with investors on a regular basis, be it sell side analysts or investor relations officers. (Believe it or not, the sell side is actually going to get some sympathy here, so read on.) The public in general, and my children in particular, tend to think of a career on Wall Street as being glamorous and exciting, but when it comes to the process of transferring information to investors, the reality is far grittier. To paraphrase Bob Dylan, I’ve often felt as if “I’m stuck in New York with the road show blues again”.

Consider the following as it relates to investor roadshows:

1. A schedule only a marathon runner could love. Your typical roadshow day may involve a breakfast meeting, 3 – 4 morning meetings, a luncheon meeting and 3 meetings in the afternoon. This is followed either by dinner (possibly a meeting) or a sprint for the airport to get to the next city. Drag yourself into your hotel room by 10:00PM. Get up the next morning and do it again. Repeat as necessary.

2. Mind numbing repetition. All road shows revolve around either a powerpoint presentation, a pitch book or a set of talking points. This means that after the first two, or at most, three meetings you’ve got your routine down and there’s not a lot going on to hold your interest as you speak. Presentations go into autopilot mode after that. I’ve done presentations where I get to the end and I honestly don’t remember much about the middle part of the presentation. Fortunately, no one was giving me a funny look at the end, so I must have stuck to the prepared remarks.

3. Answering the same questions multiple times. I talked about this in the last post, but it bears repeating: 95% – 98% of all questions asked by investors are the same, whether you are at Fidelity or a small specialty research shop. During road shows, I have, on more than one occasion, found myself beginning to answer a question only to stop and ask the investor, “Have I said this before?” That’s because, less than an hour earlier, I actually was giving exactly the same answer, only to a different investor.

4. Incredible boredom. Take all of the above and add to it the fact that you’re escorting senior management around to visit investors. That means that you don’t get to talk, because investors are there to hear the big kahuna, not some investor relations officer. So you sit there and you listen to the same presentation and the same questions over and over. If you’re lucky, you might get to answer one or two questions on topics that senior management doesn’t like to handle, such as pension accounting. They don’t make coffee strong enough for this process.

So, is there a better way? Unfortunately, probably not. In spite of the advances of technology, investors still want to have the personal touch; they want to look you in the eye and judge the integrity and veracity of what you are saying. Teleconferencing and conference calls just don’t accomplish the same thing. Institutional investors are committing millions of dollars with each investment decision and their duty to their clients demands that they meet personally with management. They just shouldn’t expect the meeting to be particularly original.