Never Ask Can We Meet with Vanguard, and Several Other Ways to Lose Credibility as an Investor Relat

As a young associate covering Overstock.com, I once wrote about their 4Q08 earnings, “Overstock.com beat the quarter, but missed full year estimates.” Doh! We all make mistakes and hopefully learn from them. With that sentiment in mind, here are some thoughts on how to maintain credibility as an investor relations officer.

The worst thing an investor relations officer can do is unwittingly show incompetence with an investor or investment bank. If either constituent can smell blood in the water, then the entity will look to exploit you for any advantage possible. The buy-side will look for greater insights, while the investment banker will push you for deals. Think a more sophisticated form of what will it take to get you into this car? Here are a few simple ways to maintain your credibility:

Never Ask to Meet with Vanguard on an NDR

Passive investing represents a large portion of many public company investor bases today. At DFT, our investor base consisted of 30% being passive investors. The prevalence of passive investing puts some pressure on the IRO to set up or want to meet with the passive investors in their shareholder base. The problem is that such entities are not making stock purchases based on fundamental analysis. Often times, the shares are bought and sold due to changes in index membership or likely some environment, social, or governance (ESG) issue. Investment banks have no relationships with the PMs at these firms because there is no need for active research at these shops.

Never Talk Up Numbers

The worst situation you can find yourself in is to be the CFO who always feels a need to talk up numbers. The analyst asks what does revenue look like next year? The CFO starts by giving the guidance range. Next thing you know the CFO or IR guy starts saying well we can move the range if x, y, or z happen. Once you hear yourself utter these words you need to back track immediately. Many of us are guilty of this bullishness, including myself. The problem is talking up numbers just sets you up for fail expectations in the future. Always consider giving a haircut to numbers when possible. A rule of thumb we used on investment banking deals was take your initial cut of guidance, and then cut it by 10% before providing actual guidance to the Street. Be conservative, but do not sand bag!

Never Use Industry Data Generated by an Investment Bank

Using industry numbers developed by an investment bank shows an incredible lack of sophistication and competency at the public company. Once you utilize the data created by the investment bank, you cede all control to the investment bank. First, you are telling Wall Street that the only analyst to talk to is the analyst and bank that generated the numbers. Second, no other sell-side analyst covering your company will be able to use that data. Anything you put into an investor deck should be usable by the sell-side, as they are going to use the data to help sell your story to investors!

Follow the CFA rule, always try to recreate or go to the source data of any analysis before actually using that analysis. A company needs to develop or generate its TAM data internally or from non-investment bank third party sources in order to drive credibility and usefulness. After all, the goal is to provide data that can be used by all to drive a consensus among analysts to tell the best story to sell your stock. The Contract Research Organization (CRO) industry represents a real-time example that uses analyst developed quantitative market data in investor presentations.

The only time I would recommend using investment bank generated data would be for qualitative explanations. At DFT, we used a qualitative explanation generated by Barclays to help REIT investors better understand how Datacenter REITs compared to traditional REITs. Still not the best situation, but sometimes you just have to use the data.

Never Put Explicit Valuation in an Investor Presentation

The problem is not necessarily discussing valuation explicitly, but the lack of sophistication around such a discussion. The primary problem with most investor presentations is a lack of numerical context. If a metric looks good then the company wants to throw it in the investor deck. Investors are not accountants, investment decisions carry some subjectivity, and no attractive metric has meaning to an investor unless the correct context is provided. Attractive spot metrics have no value, as all numbers and performance are always relative to the investor. Investors are constantly asking do I buy this stock or something else, because they want to focus on what will likely to go up sooner and/or higher.

At Reficio IR, we believe the best practice revolves around creating a competitive benchmarking slide. Rather than call out valuation, utilize key operating metrics that can illustrate the value of your company, and provide a comparison to your competitors for context. The buy-side always calculates its own valuation, and rarely relies on the sell-side for valuation, so it is unlikely they are going to rely on the company for valuation either. If all you do is provide metrics and no context you have failed to give your audience the primary catalyst to buy the stock.

Limiting Accessibility

In my view, limiting accessibility represents a strong litmus test for the overall quality of an IR program. Great IR is a function of clear and confident presentation, as well as open and transparent communication. In other words, you cannot selectively pick who to talk to on the sell-side because you like or dislike their research or rating. If you want to limit management access to negative analysts, so be it, but the IRO needs to have open dialogue and communication with even the most negatively biased analysts. Keeping these lines open will allow you to remain in control and know what the hot button topics are for the shorts. Knowing these hot buttons will allow you to better understand how valid or silly the short/negative claims may be.

At a minimum the IRO should welcome the opportunity to spend time with negative analysts for several reasons: (1) Contact with these analysts allows you an opportunity to change minds. One never knows what data point or argument might make the analyst re-think the negative view point. (2) The IRO will get valuable intelligence to see how credible the sell/negative argument may be. The interaction will then allow the IRO to craft a rebuttal in a positive way that can be disseminated to the street via investment deck or investor calls. (3) Lastly, it allows the IRO to take the temperature of how entrenched the analyst or view point may be.

My interaction with UBS regarding DFT stock represents a real-time example of how not limiting accessibility is a good thing. When I started at DFT, and for most of my tenure, UBS represented the perma-bears on data center REITs. Regardless of their outlook, and regardless of the fact that I thought they would not likely change their view easily, I made time to talk and educate them on our position. UBS did not change their rating during our tenure, but we believe the work we did with UBS ultimately bore out in UBS’ upgrade of Digital Realty Trust in January of this year.

Clearly, there are times one must limit accessibility, specifically if the company is in a major crisis, especially related to a negative analyst or investor call.

Taking it Personal

One of the worst sins of an IRO or management team is taking sell-side research personally. Markets only work when there is transparency, and part of strong transparency is having both positive and negative view points. Once you have taken a note personally, you are no longer objective in your own approach. Investors will pick up on this issue, which can then bias investors against you. The buy-side is constantly testing both analysts and managements to see if they can keep their cool when they dislike certain actions. Losing your cool represents a loss, because at some point the investment community will just lose faith in your program. On Wall Street the person who acts craziest under pressure usually loses!

Never Do an NDR with a Non-Covering Bank

At Reficio IR, we believe an IROs philosophy on NDRs represents a major point of separation from good investor relations and being just another guy. One of the worst pieces of advice I have seen is that a company should consider doing an NDR with a non-covering bank. If you are in technology or a well-established, and stable industry giving an NDR away for free shows a lack of understanding of how the sell-side works. Analyst compensation depends on meeting NDR quotas. Investor relations and the company can send a message of anger by not providing NDRs, and furthermore, not providing investment banking business. The more NDRs and more banking you do with an analyst, the more entrenched they become. They only time a free NDR might make sense is if your company is a biotech Pied PIPEr, meaning your company does not really create drugs, but exists merely to reach the next capital raise.

Never Tell Investors You Watch Your Stock

The stock price should be of no immediate concern to the executive team. The key mantra we live by at Reficio IR is “If we execute on what we say we will do today, the stock will be higher one year from now.” The executive team really has minimal control on what the stock price does in the near-term. Executives are better served focusing their energy on what they can control – the business. If you are an executive that went to the “Chainsaw” Al Dunlop school of watching your stock’s every tick do not admit that to Wall Street.