Chapter 13
IN THIS CHAPTER
Discovering what to look for from conference calls companies hold with analysts and investors
Finding out how to evaluate the importance and value of news coming from company executives
Uncovering what happens at annual shareholder meetings
Parsing through news about individual companies and stocks in media reports
Unless you belong to an exclusive country club, are in a Rolls Royce collectors’ club, or jet out to Davos for the World Economic Forum every year, you probably aren’t on a first-name basis with the CEOs of the companies you invest in. In fact, you might never have heard the CEOs’ voices, even though you’re entrusting them with your money.
With very few exceptions, most individual investors won’t get a chance to sit down face to face with a company’s CEO to discuss the future of the business. The relative unavailability of management to investors is one reason why a vast majority of fundamental analysis is based on closely examining a company’s written financial reports and regulatory filings.
There are times, though, when members of a company’s management team speak to investors. The most substantive meeting top-level executives have with investors is typically during analyst conference calls at the end of each quarter. These meetings, usually available to all investors on a limited basis, can contain critical pieces of information fundamental analysts need to be aware of. There’s also the shareholders’ meeting, an annual gathering of a company’s executives and investors. Finally, companies may release important fundamental data while appearing in the media.
In this chapter, you’ll find out how to extend your fundamental analysis beyond the financial statements to include monitoring conference calls, shareholders’ meetings, and media appearances.
Every quarter, investors eagerly anticipate when companies they’re interested in will report their financial results. As soon as the results are available, fundamental analysts start poring through the quarterly earnings press release, as discussed in Chapter 4, to get an idea of how the company did during the most recent three months.
The earnings press release is pretty complete and usually provides the income statement, balance sheet, and sometimes the statement of cash flows. Still, fundamental analysts may have lingering questions. Some analysts might wonder, for instance, why certain costs rose but can’t find a reason for the increase in the earnings press release. Other fundamental analysts might notice a surprisingly large decline in cash.
That’s where the analyst conference call comes in. Usually, shortly after the earnings press release is disseminated, the company sets up a telephone call or web broadcast for Wall Street analysts, who cover the stock, to call in and listen to a discussion about how the quarter went.
Analyst conference calls aren’t a chance for the CEO to trade recipes and golf stories with Wall Street analysts. While some of these calls sometimes seem oddly chummy, they are supposed to serve several primary purposes including:
Field questions from Wall Street analysts. All the analysts who cover the company are usually permitted to ask questions about the quarter’s results. Many of the analysts also try to extract more forward-looking information from the CEO, to get an idea of what the next quarter’s results might look like.
Some companies are trying to give regular investors greater ability to ask questions during the analyst conference calls. Morningstar, a market research firm, for instance, allows any investor to email questions to management. The questions are then collected and answered by the management team each month. It’s a good idea to see whether a company you’re analyzing will allow you to pose questions.
Some investors are initially surprised to hear some companies provide earnings guidance. It might seem somewhat strange to think CEOs would be willing to make promises to investors about the future, when the future is far from certain. You might think that, if a CEO says the next quarter will be strong, that you can quickly make a profit by jumping into the stock.
But guidance isn’t as mysterious as it might seem. For one thing, many companies have a pretty good idea of what their book of business, or expected deals with customers, will look like months in advance. That’s why when CEOs give guidance, they might not be taking as much of a leap as you’d think. Some CEOs, too, might give guidance they think will be easy to beat. That way, even if the quarter was just as expected, investors might view the financial results as better-than-expected and buy the stock.
Some companies, seeing the often perverse way some investors use earnings guidance, are not giving it out anymore. Companies including Berkshire Hathaway, Alphabet (formerly known as Google), Coke, Citigroup, and Ford have, at one point or another in recent years, stopped giving earnings guidance to investors. It’s somewhat of a trend in recent years for companies to not give guidance. Most companies’ management, though, do give investors some indication of what they think the future might look like.
If a company suddenly stops giving earnings guidance, there’s reason to pay attention. Generally, investors assume companies stop giving earnings guidance when they foresee a rough future. For that reason, typically, a company’s stock price will suffer around the time it stops giving guidance, according to an academic research report called “Is Silence Golden? An Empirical Analysis of Firms that Stop Giving Quarterly Earnings Guidance.” Also, when a company stops giving guidance, the growth forecasts from analysts for the company may be all over the map and could be less reliable. You will want to keep in mind whether or not a company provides guidance when using analysts’ forecasts for earnings, as described in Chapter 17.
During a conference call, you’ll want to make sure the management team adequately steps through and describes the just-completed quarter’s results. That’s really the most basic reason for the call. But as a fundamental analyst, some of the other things you should watch for in the analyst conference call include the:
Tone of the executives: Be on the lookout for CEOs and top management who act like it’s their company instead of the investors’. One warning sign a management team doesn’t understand it’s beholden to the public is when executives act agitated when answering questions from analysts or investors.
The classic case study of what you don’t want to hear happen in an analyst conference call occurred while Enron management was discussing the company’s quarterly results in April 2001. Prior to the discovery of the massive accounting scam, one analyst pressed executive Jeff Skilling for reasons why the company continued to provide scant financial details in the earnings press release. Skilling fired back angrily, directing profanity toward the analyst. That’s not a good sign.
Lack of availability: While nearly all companies conduct an analyst conference call, they are not required to do so by regulators. Regulators only require the timely filing of regulatory documents, including the financial statement. It’s up to the company to decide whether or not to hold an analyst conference call.
However, when a company doesn’t provide a conference call with analysts, that lack of dialogue is somewhat problematic for the fundamental analyst. Some analysts also grouse when companies only provide highly scripted and prerecorded conference calls.
Now that you’ve read about the analyst conference calls and discovered how they can tell you things you can’t pick up from the financial statements, you might wonder how to access them.
Most companies make their analyst conference calls available to all shareholders in a variety of ways including:
Web streams of calls: A growing number of companies allow investors to listen to conference calls using their computers or mobile devices. Typically, you’ll find the links to the online audio broadcasts by visiting the investor relations section of companies’ websites. Some companies, including General Electric, are also offering streaming video of the calls with investors. Can’t listen to the call while it’s going on? No problem. Some companies also let you download or stream previous analyst conference calls.
If you can’t find a link to a company’s conference call on its website, don’t assume it’s not going to happen. Yahoo! Finance provides the dates of many upcoming analyst conference calls, too. Log onto http://finance.yahoo.com
, enter the company’s ticker symbol into the blank at the top of the screen and click the name of the company when it appears. Next, click on the Profile link on the top center of the screen. On the right side, look for the estimated date of the next earnings call under the Upcoming Events header.
Companies will often conduct analyst conference calls before the stock market opens at 9:30 a.m. Eastern or after it closes at 4 p.m. Eastern. This is done intentionally to give companies a chance to fully explain their results before investors rush to conclusions and either buy or sell the stock.
If you’re not sure whether what’s being discussed on the analyst conference call is good or bad, always check after-hours trading. Most financial websites will show you how the stock is behaving in special electronic trading that occurs after the stock market exchanges close at 4 p.m. But don’t think you need to start trading after hours yourself. Because the amount of stock being traded after hours is much lighter than during the regular hours, you might end up paying more for a stock you’re buying or getting less for a stock you’re selling than you would if you’d waited.
There’s no question you get a bulk of your nutrients from your breakfast, lunch, and dinner. Those three core meals deliver most of what your body needs to get through the day. Even so, there’s a chance that your diet might be lacking in some nutrient, which is why some people choose to supplement their meals with vitamins.
You can think of media reports as vitamins that some fundamental analysts take. Certainly, the regulatory filings and financial reports filed by companies provide most of the data a fundamental analyst needs. But still, there might be some details that aren’t fleshed out or are buried in the massive documents. That’s how financial media can supplement and potentially enhance your knowledge about a company.
As you’ve probably noticed reading this book, there’s not really one source of information that gives fundamental analysts everything they need to do their work. Getting a complete understanding of a company and its stock’s valuation requires digging through many documents, looking for trends, discrepancies, and other anomalies. Media reports, available on financial websites, in newspapers, magazines and on TV and radio can help flesh out your fundamental analysis of a company. Some of the things media reports can assist you with include:
Interpretation: Because many reporters are either assigned to a specific company or trained to study financial statements, they may notice something about a company announcement that you missed. Many media outlets also have access to professional-level fundamental analysis tools, so they might be able to put numbers into context using data you might not have.
Media reports, too, might make it easier for you to quickly assess whether a company’s quarter was considered to be better or worse than expected. Reporters who follow a company generally know ahead of time what analysts were forecasting for the company.
Deeper understanding of companies and the people who run them: Some executives, hoping to get their messages out, might sit down with a reporter and more clearly spell out their companies’ objectives or goals. Executive profiles might also give you more of an insight into the personalities of the people running the company you’ve invested in.
Some publications routinely provide profiles of company executives. It’s important to recognize when these profiles are just CEO adulation, and when they’re analysis.
Given the barrage of information available to fundamental analysts, it might be overwhelming to think that you need to read every financial website, newspaper, and magazine in addition to studying a company’s regulatory filings.
But savvy fundamental analysts know how to put the media to work for them. Rather than reading everything, much of which is duplicative, fundamental analysts use the media to zero in on developments such as:
Just because an executive makes a claim in the media, don’t assume it’s true. Sometimes the media outlet, or reporter, isn’t qualified or prepared to call out or correct an executive who makes a glowing statement about a product.
Bold claims made by CEOs should never be taken as absolute trust. The Securities and Exchange Commission in December 2015 charged the CEO of Oxford City Football Club for falsely portraying “himself as one of the most powerful and influential CEOs in the history of Wall Street when he’s really a penny stock fraudster mixing lies and verbal threats to line his own pocket with money from unsuspecting investors,” according to the SEC’s press release. The SEC charged the CEO with misleading investors into thinking the company was a “thriving” collection of sports teams. But the reality was very different, the SEC says. Oxford City Football Club was actually “losing millions of dollars each year and turning zero profit from its two lower-division soccer teams in the U.K.,” the SEC’s release says. Fundamentals trump talk.
Google lets you create alerts based on keywords like the name of a company or executive you want to track. You’ll be emailed when any news breaks that mention those keywords. If you’re interested in learning more on how to efficiently scan online news for information about a company, you can get some pointers in my book Investing Online For Dummies, 10th Edition (Wiley). How’s that for a shameless plug?
Fundamental analysts spend much of their time with their noses buried in financial statements. But sometimes — there’s something to be said about hearing about a company straight from the management. For some fundamental analysts, the annual shareholder meeting is the face-to-face chance to interact with a company’s management team.
The annual shareholder meeting is kind of like a corporate version of show-and-tell. Nearly all these meetings are held in large conference halls or auditoriums, and not on the companies’ premises. The companies often use these meetings as a chance to showcase all the products they offer. You can find out when and where a company’s shareholder meeting is held usually in the proxy statement, which is discussed at length in Chapter 9.
Annual shareholder meetings often follow a script like this:
Presentations from company management: The CEO and perhaps chief financial officer and chief operation officer might give a speech outlining their goals for the company in the year ahead.
There’s rarely any new information released at the annual shareholder meetings. Anything of material interest has already been disclosed in the proxy statement or the 10-K, which is explored in Chapter 12.
Typically lacking substantive information, the annual shareholders meetings are generally designed to make investors get a warm fuzzy feeling about being investors. Generally speaking, that’s the kind of feeling you, as a fundamental analyst, don’t want to have.
A few companies are especially famous for their annual shareholder meetings. Shareholder meetings of Warren Buffett’s Berkshire Hathaway are especially legendary. Scores of Berkshire investors descend on Omaha (the CHI Health Center was the location of the 2022 meeting) to try to get close to the Oracle of Omaha.
The Berkshire Hathaway annual meeting is such a big deal it’s almost like a weekend getaway. At the meeting in 2022, events included a Pack Your Own Box experience where attendees filled their own boxes of See’s Candies, a Berkshire Picnic, and a 5K running race. There are also plenty of opportunities to buy and try products sold by Berkshire companies ranging from See’s Candies to Borsheim’s Fine Jewelry. Buffett usually refers to the event as the “Woodstock for Capitalists.”