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Don't Listen To Management (Cestrian Stocks Bulletin #78)

Cestrian Stocks Bulletin
Don't Listen To Management (Cestrian Stocks Bulletin #78)
By Cestrian Capital Research, Inc • Issue #78 • View online
If when you hear the word “democratization” you think “ooh goody”, this note’s for you.

DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Signal To Noise
As a big-shot institutional investor, the bigger your checkbook, the more signal and less noise confronts you every day. If you own a big ol chunk of Company X’s stock, and you want to meet with the management team to take them to task on something, you can just pick up the phone and go do it. The management team can’t tell you anything that isn’t in the public domain - well, they can, but you don’t want them to, unless you think you might like prison food - but they can explain numbers and prior statements in plenty of detail so that you can go back to the office and tweak your financial model accordingly.
If you’re a small-time institutional investor, just a few bil under management, good luck with the above. You’ll probably get past Company X’s CEO’s assistant, you may even get a Zoom call, but you won’t get their people meeting your people to work through a spreadsheet together over a fancy lunch that they paid for.
If you’re a retail investor, you’re buying your own lunch and the best you can hope for is to read the SEC reports, the earnings releases, and tune into earnings calls. You can, if you like, read the manifold “investor presentations” or attend the endless “investor conferences” that nowadays you can find online. Who knew that Goldman Sachs or Morgan Stanley or their brethren were so concerned about the poorly-informed nature of retail investors that they felt compelled to open up hitherto invitation-only industry conferences to Mr & Mrs Miggins dialing it in? The public-spiritedness is enough to warm your heart.
Er, except not.
We’ve said many times that investing is not as difficult as everyone would like you to believe it is. You have a whole industry dedicated to generating disclaimers, warnings, opinion, analytical methods, buy signals, sell signals, and now Discord servers, Reddit fora and a million and one other sources of noise. You literally cannot get away from it. But if you want to become a better investor, the best thing you can do is switch most everything off (start with CNBC which seems to have a business model predicated on inducing the modern version of pre-millenium tension in each and every viewer), sit back, get a plant-based coffee, and take it all back to the old school.
Here are some activities we find useful in our stocks research:
  • Take a quick canter around the company website. If the thing the company does is way beyond our comprehension, stop right there and proceed no further. If it fits in a box we know well, continue.
  • Read the three key financial statements in the most recent 10-Q or 10-K filed by the company. Then text search in those same documents to find the remaining performance obligation data, if the company contracts and reports that way.
  • Build model of company. When we say “model” we aren’t talking sophistication here, as you know if you’ve read our work already. You can over-think these things.
  • Look at the stock chart. Turn it through 180 degrees and back so we can be sure we are looking at it the right way around. Draw some lines on the chart and do a little coloring-in.
Once we have our standing model and a view on the chart we then are sure to dial into the next earnings call, to update our model and also to listen very carefully to the call. Very carefully. But not for the reason you might think. Not to listen to what the management team is saying. Because that stuff, that’s all worthless. If you’re the bigshot institutional guy, gal or nonbinary in a private meeting with the CEO and CFO, sure, listen to management, take them to task. You’ll likely make some headway. But the earnings call? Lol.
Earnings calls are just theater. Half an hour of prepared remarks so boring and predictable that they achieve their aim which is to cause you to doze off or look at presentation slides (also worthless) or something like that. Live spitpost on StockTwits. Idly wonder what happened to LineRider, Google it, find out it’s still a thing. Watch some LineRider videos. Staple your finger to see if you can still feel anything or whether your body has gone as numb as your brain. Anything to relieve the tedium. Next, half an hour of Q&A between sell-side Wall St analysts and the management team. This too is pure soap opera. The goal of the sellside analyst is mainly to impress the other sellside analysts on the call with their insight and also to impress their boss back at the virtual office, but not by being supersmart and asking the question - you know, the question specific to that company that every business is worried you will ask - but by asking a question just smart enough to show they understand the business but not so smart that the CFO says, no we are not using that bank to place our next convertible. Walking the line the whole time.
In short most of the words said on earnings calls are useless. But the spaces in between the words, the noises-off, the mistakes? That’s where things get interesting. Great athletes find space where there is none; great musicians can stretch time and yet remain in time; great investors find insight where none has been offered.
Here are some useful things to listen for on earnings calls - or for that matter those “you’re special to us this one’s just for you and every other node on the Internet” investor presentations.
  1. Late start. Translated - management team arguing about what they are going to say. If the call starts late the team are on the back foot and they will make mistakes because they are under pressure. So, sit back, sip the meat-free coffee and ask yourself, what have they messed up? What have they been arguing about? Listen carefully for differences, corrective tones, between the CEO and CFO.
  2. Buck passing. Should anyone on the call actually succeed in getting allocated a question that proves not to be a suck-up (unlikely - requires an inexperienced or last-day-in-the-office-burning-it-all-down call host), then see if the CEO passes it to the CFO or the CFO to someone else on the call. Bingo! That might just be the question. So dig into the question and what the answer might be.
  3. The phrase “we always knew that … X was going to happen”. Meaning, “we just found out that X was happening but we are going to backsolve furiously to prove our insight and genius”.
  4. Technology snafus. Because conference calls don’t actually drop out, not since about 1987. So if the call drops out, ask yourself what just happened or was about to happen.
  5. Nonverbal tics. If an audio call - glottal clicks, gulps, double swallows, dry mouth. If a video earnings call, possibly the worst kind of earnings call of all on a never-meet-your-heroes basis - poor eye contact with the camera, scratching, knee tapping etc. Here’s a great one if you can see it. If the whole face and body is serene but there is one foot tapping furiously under the table - listen very carefully to what is being said right then. Because the stress of it all is being channeled all the way to the floor and kept out of the watchful gaze of the camera.
  6. “Handing it over to you guys”. Bleurgh! More companies are doing this. In the name of democratizing the earnings call - wait whilst we vomit - they do no prepared remarks. This is blissful in some ways although bad for completing that fantastic LineRider track you’ve been developing this earnings season. But it is a bad trick. Cancels out the opportunity to spot some of the above. And in its place, a whole hour of toady questions from banks pitching for the secondary the sellside! Minutes are lasting days! Pass the stapler, and make it a compressed air one this time because the regular spring-loaded thing lacks the heft to retrieve any remnants of consciousness.
Now, any last vestiges of naiveté left the building here about a decade ago and as we exhort you often to be, we are Dead Inside when it comes to matters of the wallet. The above may seem cynical indeed to you. But we can assure you that if you approach earnings calls and presentations this way, rather than “hey I’ll check in on my favorite stock and see what cool stuff they are doing lately”, you’ll learn a lot more about the stock and what you should be doing with it.
Now The Part Where We Try To Sell You Something
If you live a life with meaning, you have faith in your fellow humans and you think that some management teams are well-meaning servants of their shareholders, you might care to outsource the blackened-heart stuff to us. We aren’t proud.
Our subscription service, Growth Investor Pro, sees us handle earnings calls in real time, having already run the numbers and sent them to you. We blog the call live in our subscriber-only chatroom with our blow by blow Opposite Day view of whatever high dudgeon might be playing out before our very ears. Sometimes a nothingburger - sometimes a signal of a YUGE issue - sometimes actionable sometimes not. But live and real time and interpreted through the lens of institutional investing careers spanning three decades.
Cestrian Capital Research, Inc - 13 October 2021.
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