Pick any industry group of stocks. If you compare valuations and trading metrics, you consistently find a couple of stocks trading at premium multiples at the top of the group. Many others trade at discounts to both the average and to those leaders — yet most of them haven’t missed earnings or had another kind of apparent stumble. So they appear to be undervalued.
With a disproportionate percentage of their wealth tied to their company’s share value, the executives of the issuers of these discounted stocks are worth materially less than they should be, often 15% to 40%. This problem compounds over time, as I’ve never seen a stock have a sudden “catch-up” moment when the market realizes it has been mispriced. Stocks tend to move more linearly to the upside. That means that if you’re undervalued now, you’re unlikely to recoup all of that value in the future.
If your personal economic interest isn’t enough to get you thinking what to do about this, remember that every one of your employees who holds company stock is in the same boat. Do they feel undervalued?
Let me use some real data to prove my point. The data points below are real, although the company names have been changed to protect the guilty. None of these companies has had an earnings miss or other material structural issue that affected their valuations.
Stocks A and B have long been considered the bellwethers of this industry group. Despite ranking 8th in the industry for expected 2018 EPS growth (over 2017 EPS), Company A was trading at a 50 multiple and its volume-to-float ratio showed strong trading liquidity at the time of this data. Company B, with half the expected growth of A, had less than half the P/E multiple, which seems more reasonable.
However, Company C, with half the expected growth rate of B, ranking near the bottom of the 20-company industry group, traded at a higher multiple and had tremendous liquidity. Clearly, it’s doing something different.
One could say that these first three companies’ executives are not only in the “good half,” being worth what they should be financially; they may even be worth more than they should be. Good for them!
But, for companies D, E, and F at the other end of the valuation continuum, stock values, trading multiples, and trading volumes do not reflect their group-leading revenue and earnings growth rates. (Note that D, E, and F do not have P/Es, as all are operating at losses, but the EPS change data reflects expected reduction in losses.) How is it that three of the top-growing companies in this industry group can trade so lightly and at such modest valuations? These companies’ executives and employees are all in the “wrong half.”
So, why does this happen? And, more importantly, what should company executives do to get themselves into the good half?
Brad Samson
The common denominator for all this is how these companies work with Wall Street — in other words, their investor relations programs. If you want proof that investor relations has significant economic benefits for companies, there is no stronger data than these kinds of comparisons within industry groups.
So, what should companies do to make sure they’re in the right half of valuation?
Let me make some suggestions for what I have found to be the IR activities with the lowest cost and the highest impact on stock value.
Get on the road and talk to investors. IR is a sales game, which means the more people you call on, the more sales you will make. Don’t just go to a few conferences; go to every one you possibly can. Even go to the conferences featuring the analysts you don’t like. Do lots of road trips with your analysts to call directly on investors. Just as a personal example, in the first half of 2016, I did 300 one-on-one meetings with investors and addressed 800 people in group presentations, which helped pull our stock back up by a third.
When I talk to IR professional groups, I always tell them this is the “job one” priority. If you only take one thing from this article, this point should be it.
If the CEO and CFO don’t have time or inclination to do this, then this activity is the number-one reason to hire a strong internal IR person. Someone who has IR experience, industry knowledge, a sales-driven focus, and storytelling skills can take this burden almost entirely off the backs of the CEO and CFO.
An alternative to hiring a strong internal IR person is working with a good IR agency or consultant. If you want to go outside, I highly recommend a firm with a model of having fewer clients with which it is more intimately involved. This is important, because IR, as a sales job, takes direct person-to-person interaction. The IR person talking to investors needs to be able to speak for the company.
Recognize that 90% of the questions investors ask are not about absolute facts, such as financials. They are 90% speculative, such as “If competitor A does X, how does that affect you and how can you respond?” All the CFOs I know hate those kinds of speculative questions. Staff this role to handle them.
Become a better friend to sell-side analysts. The top complaint I’ve heard from sell-siders over the years is that most of the companies they cover seem not to appreciate or adequately support the job they’re trying to do. Specifically, they cite putting an inexperienced and uninformed junior person in the IR role; slow management response to queries; and lack of thoughtfulness in responses to questions.
As the saying goes, “keep your friend close, but your enemies closer.” The best way I know to turn a negative analyst back toward the good side of the force is to kill them with kindness and treat them the same way you treat the analysts you love. For example, if you go to a negative analyst’s conference, you can take his or her negative points head-on. Investors will love that you aren’t afraid to confront those points.
Look for ways to expand your addressable market of investors. Let me suggest three ways to approach this. First, many of the investor-targeting systems you can buy focus on investors who have bought peer stocks in your industry group. But there are better systems that help you target investors based on how well the characteristics of your stock match a portfolio, regardless of industry. I have used these many times to great effect in finding new investors.
Second, think about other industry groups or trends that could be interested in your stock. I once worked for a printing company, but based on an expansion of our strategy, was able to gain the interest of investors who liked outsourcing plays. At another company, I moved the focus from consumer electronics to health-care investors.
Third, consider markets beyond the United States, such as Europe, the Middle East, and Asia-Pacific. Ask your sell-side analysts. There will be a fistfight among them over who gets to take you to these new markets.
Revitalize your investor story. Every year during the December slowdown, I like to sit back and make a fresh assessment of the investor deck. Sometimes I just start with a stack of blank sheets and scribble out how we’re best telling the story at that point, and then compare that to the actual deck we’ve been using.
Look at your deck with a critical eye. Does it inspire? Does it do a good job of painting the opportunities your company is pursuing? Does it adequately explain your strategy? Are the proof points strong? Do you have a strong opening “hook”? If this were your IPO deck, would it sell?
The only one of those questions that may not be obvious is the “hook,” so let me elaborate. When you’re giving a speech, it’s best to (verbally) slap the audience across the face to get them to put down their phones and start paying attention. Sometimes I like to ask a show-of-hands question. When I was at Fitbit, I asked how many people in the room had an Apple watch.
Sometimes I have a killer statistic that wakes people from their lethargy. For example, at one company, I did some research and found that the problem the company solved, hospital communications errors, was the number-three killer in the United States after cancer and heart disease. Leading with that got people’s attention.
Note that none of these suggestions are that difficult or expensive. If your stock is undervalued, my hypothesis is that most of the time it doesn’t have to be. Take some of these concrete steps to up your game with Wall Street and be worth what you should be.
Brad Samson is a 20-year investor relations executive, most recently the head of IR at Fitbit. He’s currently providing strategic counsel to several early-stage companies.
