Less is more – the 0700hrs lexicographer’s guide
19th Jan 2022
In this month’s Insight, Fund Manager, Paul Marriage, discusses the nuances of company news flows and financial statements, and the value which they bring to active management.
I have been reading the regulatory news posts from companies, issued at 0700hrs Monday to Friday, for over a quarter of a century. You’ll see me drop the novel and grab the iPhone as our train moves from agricultural primacy to urban sprawl somewhere near the M25. The advent of ETFs with daily NAVs has created a lot of noise between 0703 and 0705, so it’s key to be tap and swipe ready in the late 0650s. By 0715 it’s all over; hence anyone who risks joining the team chat after then is greeted by a cheery ‘Evening’ from yours truly. Statements issued during market hours are less and less common, with the survivors invariably being unexpected bad news.
The content of these statements will set the tone for share price performance on the day often for days and months to come. The financial facts that companies divulge will dictate market reaction, but how companies tell us can often be just as insightful. There are two main tenets that define better companies in our view – telling it like it is (honest and straightforward) and less is more (company statements should be brief and factual rather than promotional). Management teams should focus on running companies well, markets can decide what the shares should be worth.
In a market that likes the binary, a beat or a miss against expectations, there is a lot of nuance in terminology. While companies are always keen to state when they are ahead, they understandably are less ready to highlight being behind. We see more ‘marginally’ and ‘modestly’ ahead statements than we do marginal misses; in fact, many corporates will use the terms ‘broadly in line’, ‘with the range of expectations, albeit at the lower end’ to massage a miss. Don’t be fooled, they are all misses to a certain degree. ‘Materially’ ahead is an almost quantitative definition and will usually mean >10% delta (shamelessly sneaking the Greeks in somewhere to give this note some gravitas) either ahead or behind. If you ever see a company use material for an upgrade and the consequent change to numbers is <10% that’s a yellow card.
Any headline that starts with a ‘Statement re…’ should produce the initial muscle reflexes that might ultimately lead to fist bumps and air punches. There are a few very grumpy moments when the next sentence is ‘US litigation’, but the majority of the time the following words are ‘possible offer’ and unless we are short the shares in a long/short fund or the bidder is a complete miser then its good news. ‘As previously stated’ is another one to instigate the pre vomit reflex – invariably this will be when a company relates to a previous issue that has not gone away. The second warning (often of three) has arrived. The worst share price reactions are often held for those ‘good companies’ who discover bad things in their inner workings. Most often this will be some accounting fudge, contract dispute or small to medium scale fraud that has escaped internal audit – usually, the terms ‘accounting irregularity’, ‘seeking legal advice’ and ‘full external review’ are nailed on shockers in this respect.
A long and very upbeat statement that results in a reduction in expectations is worse than the upfront ‘sorry everyone, were having a ‘mare’ profit warning. Companies’ advisers should really know better than to even contemplate a fulsome and wordy exposition of what fine form the company is in only to have a final paragraph that states that actually the new year has started badly, costs are going up and it’s a 30% downgrade. We have seen a couple of these this year already, and perhaps that is a result of generally better company performance than worst fears into the covid flap of Q4 21 against the stickiness of cost inflation as companies look forward. The attempt to dupe investors for the first 3 paragraphs (maybe 30 seconds of reading) before you tell them the not such pleasant truth is universally low quality and reflects poorly on the management team and their advisers.
The regular schedule of statements should mean nearly everything that you want to hear falls into two headline buckets; ‘Results’ (either half or full year), and ‘Trading updates’ (sometimes also referred to as Interim Management Statements or Business Updates). We are always wary when a company is trying too hard to communicate what it thinks is good news by summarising results in a headline which is often transposed into the official RMS descriptor. ‘Givesgoodchat plc – record results and positive trading update’…yuk…we’ll read the statement and then decide whether the company deserves the medals. We hear an awful lot about Artificial intelligence (AI); mostly how it is going to replace us and then probably make a lot of good/bad decisions that result in a perfect/scary future – delete as appropriate. The portents are not good, every morning I am beaten to the interpretation of statements by anywhere between 15 and 150 seconds by the Bloomberg computer which generates a headline such as ‘revenue beat/miss’ or ‘record results’. For smaller companies, the consensus it is using to make the comparison is often incomplete or very sketchy. About 50% of the time the computer gets it wrong and misreads what the actual conclusion of the company statement really means for the share price. If there were not humans reading and interpreting these statements and making judgments with subsequent buying and selling decisions then one assumes the market would become much less efficient. Shares would be bought on false good news, sold on false bad news and companies would rarely be properly valued and one would assume that volatility would ramp up. Or might that just be a David and Goliath rant from an active manager who still thinks they add value by setting the alarm with an 0400 handle? For the sake of fairness to the technologists we have initiated a small piece of work from our data guru Ruggero Gargiulio to track keywords over time this year – if the results are interesting we’ll keep you posted.
The end of a statement is also worth a scan – has the company given contact details that are of any use? A real number and email for the CEO or CFO and the IR person is the gold standard, with no change of chosen personnel from statement to statement. The platinum service – when the CEO calls just to see if we have any questions in the first hour or two of the day – is always to be applauded. Recycled cardboard standard, however ESG friendly, is no company contacts and just a banker or financial PR person to deal with the incoming after bad news and conversely just the CEO when it’s all rosy.
There aren’t too many things in life where ‘less is more’ or ‘quality over quantity’ are not your best choices and this is firmly the case at RNS time. Notable exceptions are England test runs, % fund returns and Fridays.
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