Risk & Compliance

Who Will Buy?

A new tool enables companies to predict with greater confidence which investors will buy, or sell, their stock.
David McCannApril 7, 2010

Public-company CFOs may find some appeal in a new tool designed to identify institutional investors with a high probability of buying a company’s stock as well as existing holders at risk of selling, an investor-relations consultant says.

Smart Targets, which Thomson Reuters is providing free to customers of its Thomson One IR suite, is unusual among investor-targeting tools in that it analyzes a company’s current shareholders differently from prospective ones. The approach is based on a study of 10 years’ worth of stock-ownership data showing that different factors predict the behavior of the two groups, Thomson Reuters says.

An internal shareholder analysis of any kind is an improvement over the investor-targeting methodology many companies employ: asking sell-side analysts to recommend targets or set up meetings with them. While companies generally want investors who will hold their stock for an extended period, brokerage firms make money trading shares, points out Brad Wilkes, managing director of financial and investor-relations consultancy Sard Verbinnen and current chairman of the National Investor Relations Institute. Issuers should be careful if they outsource their investor targeting to analysts, he warns.

The Thomson Reuters service, by comparison, “looks like a useful and efficient way to do something that would take a long time and a lot of resources to do on your own,” says Wilkes. Still, he adds, the service’s value may be marginal, “because there are so many things that influence an investor’s interest in your story” and because of the recent rapid growth in high-frequency trading and passive investment vehicles. “A lot of trading activity is not covered under the [Smart Targets] methodology,” he says.

But that is intentional, responds Bill Haney, head of investor-relations services for Thomson Reuters. Since CFOs and investor-relations officers can’t affect passive investments, what they care about are investors who make active decisions, he says. So, rather than looking at trading data — “which has a lot of noise in it,” says Haney — Smart Targets uses the ownership data that institutional investors and mutual funds disclose publicly. Based on what they held, inferences can be drawn about what they bought and sold, month to month and quarter to quarter.

The Smart Targets predictive model incorporates such factors as investors’ holdings in similar (or peer) companies; fundamentals (24 of them, including growth rate, price-to-book ratio, dividend yield, and earnings characteristics); saturation (current holding in a stock as a percentage of maximum potential holding); and momentum (relative tendency to buy based on short-term news).

Ownership data shows that for prospective investors, peer groups and fundamental factors matter most, and that a common assumption — an investor’s volume of assets under management is the leading indicator of what stocks it will buy — is a myth. For current holders of stock, on the other hand, saturation and momentum take precedence, says Haney.

Overall, peers matter more than anything else, according to Haney. Thomson Reuters recognizes three types of peer groups: companies in the same industry, companies with similar fundamentals, and peer sets developed by sell-side analysts that don’t necessarily correspond to industry or fundamental peers, “which matter a great deal in terms of suggesting a strong fit and strong propensity to buy and sell,” he says.

The model predicts an investor’s net share purchase or sale over the next six months. “Are we right 100% of the time? Of course not,” says Haney. “The efficacy ranges from 35% to 100% depending on the strength of signal. But it does suggest an order of magnitude: which investors you ought to be paying attention to.”