Greed and fear. Avarice and anxiety. Covetousness and alarm. Rapacity and cold feet. Uncontrollable desire handcuffed to unspeakable dread.
My topic today is how to attract investors. So, I thought I'd start with what motivates them.
Yes, sorry to say, fear and greed drives an investor much as the quest for food propels the hungry.
Think about your own investment behavior. Your rich and wise Uncle Moses tells you at Cousin Muffy's wedding about Big T.com--a stock his kayaking buddy says will triple. Does the thought of buying Big T cross your mind? Greed. Covetousness.
You hear a radio report on your drive home that auditors claim that CD Now doesn't have the cash to make it through the year. You own a thousand shares. Apprehension? Panic?
At our firm, we've spent 30 years focusing on corporate and investor behavior. Let me touch on a half dozen ways in which we believe companies can maximize the odds that they will attract and keep desirable investors.
Regardless of the specific criteria of a particular investor, all investors buy stocks for the same reasons--risk and reward.
Investors don't care about your company's products and services in and of themselves. Descriptions of your company's products and services are only interesting to an investor if they help convince the investor that the potential reward of buying your company's stock is high and the risk is low. For example, here are two ways the same company can tell its story. You decide which one interests you more.
Story One: "Our company has invented a pair of sneakers that will enable the elderly and people five feet tall and under to dunk a basketball." Story Two: "Our company has identified a two billion dollar market opportunity and we're the only company addressing it."
If you're four-foot-eight and your life's aspiration has been to dunk a basketball, Story One might make you run to the store to buy the sneakers. It's a great product pitch. But if you're an investor that doesn't play basketball, you might hear Story One and say "Who cares?" If you're an investor and hear Story Two, which directly addresses what investors most care about, namely risk and reward, you might be very interested to learn more about this company, even though the story I just told tells you nothing about what the company does.
Another example could apply to a high-tech auto parts manufacturer. One way to tell their story might be "Our company installs devices that enables cars to drive themselves along pre-designated routes." This sounds interesting, but, as an investor, you might think to yourself "Most people can drive fine. Why would that many people want to spend good money on a device that makes a car drive itself?" But what if the manufacturer positioned their company by saying "We install devices in cars that enable the world's 800 million parents to no longer have to leave work early or stop working entirely to drive their kids to and from school." Now it sounds like this company might be able to make some serious money. Definitely worth considering as an investment. See the difference?
Take a look at your company's investor presentation, earnings releases, the investor section of your website, your ad hoc news releases, annual report, conference call scripts, and the like. Look at everything your company puts in front of investors and everything your spokespeople say to investors. Does the material address what investors care about? Does it grab their interest within the first ten seconds? Investors have the world's shortest attention spans.
If you don't paint a compelling risk/reward picture, investors may miss the reasons to care about your company.
Being descriptive about your company is different from being persuasive to investors. Describing your company is easy. Persuading investors is hard. Effective storytelling adds a lot of value.
Investors value different industries by different metrics. In the airline sector, EPS growth is important. In the wireless sector, it could be the potential for operating cash flow that's most important. The question is, how does your company stack up versus the competition? What do you need to feature to investors in order to put your company's best foot forward?
What we see at the moment is that American and Continental are the most attractive in terms of potential reward, offering the promise of 29 and 26 percent growth, versus United's 8 percent. Now, United's 8 percent wouldn't seem so low if it was competing for portfolio capital with the average electric utility, which offers something like 5 percent EPS growth. But it's not. It's competing with companies offering 29 and 26 percent growth.
Maybe United makes up for its lack of reward prospects by offering a risk profile that's well below average. To measure risk, as a professional investor you might look to see the level of disagreement of the analysts' forecast about a company's future. The thinking is that the the greater the differences in estimates about a single company, the riskier the outlook. Measured in standard deviation, we see that United's risk profile isn't unusually low.
Okay. United's not offering a great reward relative to its competitors, and its risk isn't unusually low. Maybe its selling for such a low price that its risk and reward profile suddenly becomes attractive. Let's look.
Nope. United's p/e is lower than Continental's, but its not much lower. And American, which is offering much higher potential reward is selling at a multiple that's even less than United's.
If you're American Airlines, it's clear that your earnings potential and the certainty that you'll achieve it make you stand out from the competition. If you're United, you should probably feature the certainty of future earnings. If you're Continental, you should probably focus on talking about the great upside potential for your EPS growth.
But whatever you're talking about today, it's important to keep monitoring your competition. Over time, your competitive weakness may become a relative strength, and vice-versa. You should compare your company's investment highlights to that of your competitors at least once a quarter, and be prepared to change your investor presentation.
Let's spend a moment defining competition. Investors are comparing your company to every public company. Sure, American's risk, reward, and price characteristics are the standout in this group, but they may not be a standout versus Microsoft. Just because American doesn't sell software programs and Microsoft doesn't offer flights from New York to Hawaii, doesn't mean that investors don't compare you to these companies and can't freely invest in all of them. They can, and they do.
Also, competition for portfolio capital is global. AT&T, for example, is regularly compared to British Telecom and Nippon Telegraph and Telephone. Companies from all over the world have made themselves known to U.S. investors, and, as a result, your company's characteristics often have to measure up against global competitors.
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