Dirk Lever, AltaCorp Capital Inc.
Annus Horribilis
The year 1992 was described by the Queen as her personal Annus Horribilis, and 2016, for many businesses, is likely tracking a similar description. As for the Queen, years later she is still around and, by the look of things, has recovered nicely. For businesses, this too shall pass. So as you are preparing for the fall marketing blitz, it is time to think about how to best position your company in light of crude crashing, Brexit bashing and interest rate slashing.
What is the Market Seeking?
Globally, the answer can be summed up in a single word: safety. Consider that in some countries, interest rates have gone negative. Consider this for a minute: in some places if you deposit $1,000, in time you will get back less. There is a baked in loss. Why would anyone invest in a guaranteed loser? Well, it may be better than the alternatives, a lot better. Such are the times today. It is no secret that some hedge funds have made returns for their investors by shorting stocks and some have likely made more money on the short side than the long. In a world without growth, we have retraction. If you are not going forward, you are going backward. This does not mean that everything retracts, just that the retractions outweigh the expansions. Safety rules and, effectively, people are paying for safekeeping. How does your company provide investors with ‘safety’?
What Went Wrong, for You
Investors understand times can be tough. As Warren Buffet quipped: “Only when the tide goes out do you discover who’s been swimming naked.” Everyone you meet will have read the papers, followed the key stories of the day, and is looking for companies that are exposed. There are likely to be few surprises, except maybe positive ones. So you are best to come clean. Tell it like it was. Be forthright and honest. If none of the world events have affected your company, you are very lucky. But remember, even the luckiest likely now face the prospect of lower growth.
What Did You Learn
What a lot of investors will be wondering is what your company has learned from past events – about itself, its market and its future. There are times where self-reflection is extremely important and times of turmoil is one example. Again, honesty is an important virtue.
How Do You Flourish Going Forward
A ‘mea culpa’ is a way to set the table for the main course; investors really want to know what your company has done to position itself for the future. In order to invest, one needs to believe the world will be a better place tomorrow; otherwise your either hide your money under the mattress or pay someone to hold it for you. IROs need to convince investors that the company has positioned itself to flourish in the future. What is your strategy? What steps have you taken? What risks do you face and how have these been mitigated? How will your company provide future positive per share returns for investors? Spell this out.
Realistic Expectations
Keep in mind during your presentation that the world has changed, maybe not forever, but for now. In the world of investing, perception is reality, because nobody knows the future. Your expectations for the future need to be realistic. In a world seeking safety, conservatism will rule. Consider even providing some scenario analysis; what happens in a no growth or low growth world? Few investors are going to be interested in your success being contingent on stars aligning.
Always Think ‘Per Share’
Remember that even though management is expected to manage the business as a whole, investors are only rewarded at the per share level. Make sure your presentation addresses the investor’s perspective – per share!
Finish Up With Reasons to Own Your Stock
It is incredible how often companies will have a lovely presentation that runs through the business, its opportunities and financial position but will not address the most important aspect of all; why should someone own your stock today? Spell out the reasons. In fact, spell them out at the beginning of the presentation and make sure they are all supported in the presentation; then summarize the reasons again at the end. The conclusion should be self-evident, but no matter, state it again for your audience. Let the concluding words reinforce the thoughts you planted.
At the end of a great presentation, the audience should know three to five great reasons why investors need to own your stock today. Even if your listeners are already shareholders, give them reasons to own more; if they do not own the stock provide compelling reasons to step up now.
In Summary
Yes, it may have been a horrible year, and yes, some things went wrong. Make your case in terms of what management learned and has done to position the business for the future, no matter what it holds, and how the company can safely provide investors with reasonable economic returns per share.
Dirk Lever is Managing Director, Institutional Equity Research, AltaCorp Capital Inc.