Investor Relations and the Short Attack

One of the most stressful and disruptive events for an investor relations officer is the short attack. Most IROs and companies are ill-equipped to effectively combat a short attack. In our view, shortcomings primarily revolve around a poor defensive moat built around the company’s IR program. The defense against a short attack begins with implementing an integrated four-tool IR program (earnings release, earnings slides, an investor deck that includes competitive benchmarking, and regular investor meetings). Complementing such an IR program with robust sell-side coverage, and a well-defined competitive set, creates the soundest defense against a short attack.

The Primary Components for a Short Attack

The most attractive short targets typically operate in an industry of one with few sell-side analysts.

Think about this for a moment.

How often do C-suite executives comment that they have no competitors? Even further, how often do you read a 10-K that lists no true competitors?

Additionally, how many companies would prefer to limit their sell-side coverage? Many companies typically complain once the sell-side burden increases above 10 covering analysts.

If you operate in an industry of one, then the short attackers will easily be able to take control of your company narrative. In an industry of one, company commentary and narrative cannot be corroborated by anyone. A strong company narrative supported by several sell-side analysts and robust competitor set represents the basic foundation against being short attacked.

Building the Short Defense Moat

Defense against a salacious short attack begins with the development of a well-integrated IR program revolving around open and transparent communication with both constructive and negatively biased investors. There are four primary components of a well-integrated IR program that when used optimally create open and transparent communication that cannot be ripped apart by short sellers.

Earnings Release: The earnings release (ER) needs to disclose as much color about the key financial KPIs as possible. The best ER takes into consideration how analysts drive the revenue function in their financial model, and then provides decent color on financial performance. At a minimum, the ER should disclose color on the key financial KPIs that will drive an investor’s financial model.

Earnings Slides: Illustrating the change over time regarding your financial KPIs represents a valuable tool. Such an illustration allows the Street to understand your position with a quick glance. Limiting the earnings slide deck to an illustration of the key financial KPIs allows investors to quickly hone in on what matters.

Investor Deck: The investor deck represents the primary driver of investor and industry dialogue. A well-developed investor deck allows you to define what matters most for your company and the industry. The investor deck allows the company to go on the offensive to better explain investor debates affecting the company and/or industry. A good deck drives industry dialogue, allows an investor to initiate on your company in a weekend, and establishes the narrative you wish to tell Wall Street.

An overlooked component of investor decks revolves around competitive benchmarking. Often times, financial professionals focus on the "black and white" of operating and valuation metrics. If a calculated metric looks good, the data then makes it onto a slide in the investor deck. The problem with such method is that no context exists for interpretation of that number.

Investment financial analysis is always relative either to (1) your competitors, or (2) future expectations. Therefore, it is imperative to provide context to the attractive metrics you wish to provide. Benchmarking yourself against competitors on an operational basis will always be compelling for investors. Valuation comparisons should be avoided, as the company should only provide the bread crumbs for the investor to draw the correct valuation conclusion.

Regular Investor Meetings: Companies often forget that they represent one in several thousand options that investors have for putting money to work. The easiest way to establish, build, and maintain credibility and relevance among investors is through regular investor meetings. The mistake that many companies make is that they value investor conference appearances over non-deal roadshows.

Conferences represent speed dating and provide the greatest value to companies that have no control of their investor base. The non-deal roadshow (NDR) becomes much more valuable, once the company knows its key constituents and know who may or should be interested in the story.

The frequency of NDR represents a function of how well-known you are. For lesser known companies, or those rebuilding their brand with Wall Street, you will need anywhere from four to eight quarters of consistent NDRs and good story telling via earnings and investor decks. Based on experience, it takes four quarters for an analyst to really ramp and get fully plugged into a story.

Furthermore, companies underestimate just how much repetition of the story is needed in order to gain buy-in from the investor community. Regular NDRs, where you meet investors on their home turf, is the best way to build credibility over time and maintain your relevance. The NDR route will also provide some insurance as it builds deeper relationships with the sell-side, who will in turn be more likely to defend the story if they see you as credible.

Embracing the Competition: Every public company has competitors in Wall Street’s eyes. There are always three sets of comps or competitors one can use. First, the list of competitors provided in a well-written and transparent 10-K document. Second, there is the list of comps that Wall Street uses to drive relative valuation on your company. Analysts and Investors will use this set of companies to vet your commentary and performance. They will go as far as asking others questions about you and your commentary. The final set of comps can be found in the proxy statements where the company lists those companies it uses to benchmark its own executive compensation.

IROs Are Unprepared

The most common defense against a short attack actually represents no defense. A successful defense against a short attack revolves around clear and confident communication of your story in a constructive way. The only change that should occur will revolve around constructively developing a narrative around legitimate concerns addressed by such a short attack.

What is the common defense?

1. Management takes the short attack personally.

2. Management and IR seek to blow up the analyst / investor.

3. The company may devolve into mudslinging or attacks to discredit the short attacker.

4. Often times the company will just go into hiding. Calls to the company go unheard and investors are unable to get a response.

5. A common practice revolves around the company freezing out the analyst or investor.

None of these reactions represents a defense or solution to the primary problem. A short seller that has spent extensive time building a thesis is now looking to change your narrative. Sometimes the short thesis is legitimate or partially legitimate, sometimes it is off-the-wall. The best solution is always to maintain decorum, stick to your narrative, but adjust the narrative according to legitimate arguments in the short attack.

The only effective short defense is to refute constructively and maintain control of your narrative, all while maintaining your professional composure to the investor community. Remember, if something is truly wrong, it is only a matter of time before it is exposed. More importantly, once management reacts the short seller is validated and both credibility and initiative are lost.