IR Monitor – 10th May 2021
Investor Relations News
This week we begin by exploring the theory of short-termism in public markets, with reference to Under Amour’s unsuccessful wager on ‘pulling forward’ revenue. We then turn to look at why shareholder monitoring remains mission-critical for proactive investor relations and ultimately for the success of public companies. Next, we note why a record share of companies are beating earnings estimates and ask what long-term corporate earnings trends might look like. Moving on, we travel to the retail sector where activist pressures are building on executives before looking at a recent study which casts doubt over the ability of ESG investing to deliver outperformance. Finally, we discuss whether the old phrase of “sell in May and go away” holds any weight this year.
This week’s news
Under Armour sold some clothes early
The debate around short-termism continues according to Bloomberg Opinion. Supporters believe public markets are myopically focused on the short-term, while others argue people buy stock because they expect the price of a share reflects the present value of its future cash flows. Those against short-termism suggest the number of zero-revenue electric-vehicle companies that have gone public – with multi-billion dollar valuations – is evidence that public markets look beyond the current quarter and prioritise future profits. Further proof of this point can be seen, conversely, in the punishment of Under Armour for its ill-fated wager on ‘pulling forward’ revenue. With a proud history of growing revenue at a 20% YOY rate every quarter, analysts came to expect no less from UA. In the third quarter of 2015 the company found its sales were going to be below expectations so asked customers to take orders early, advancing sales planned for the next quarter. Under Armour ultimately ‘pulled forward’ $45 million in orders from the fourth quarter, into the third. And so on and so forth. This hazardous cycle continued until the fourth quarter of 2016 when the business ultimately pulled forward $172 million of revenue and was forced to admit its short-sighted strategy had gotten out of hand. UA, now charged with disclosure failiures by the SEC, remains a great case study in the perils of short-termism and perhaps, also, in the tyranny of quarterly reporting.
Shareholder monitoring remains at the heart of proactive IR
IR Magazine reminded readers that proactive investor relations are vital for the success of a public company and that shareholder monitoring should be at the core of every proactive strategy. Sifting through regulatory filings is cumbersome and prone to human error and, even with the help of financial data platforms, issuers remain likely to omit a significant portion of their shareholder base that falls under the non-reporting category. Given the current global financial system, issuers still can’t be 100% sure of their shareholder base; however, by using the best of the available technology coupled with a proactive IR strategy, issuers can now get closer than ever before. No one size process fits all and differing global regulatory regimes require unique techniques and datasets to put the puzzle pieces together but diligent shareholder monitoring is ultimately mission-critical. With a shrewd knowledge of its shareholders, a company can better manage the cost of capital, more efficiently gauge risk versus opportunity and ultimately aid share price stabilisation.
Corporate earnings rarely look this good
The Wall Street Journal has reported that most companies in the S&P 500 have surpassed analysts’ profit expectations. According to Refinitiv, as of the end of April results from 87% of those companies that reported were better than predicted. This figure, well above the historical average of 65%, is on course to be the highest rate since Refinitiv began tracking the metric in 1994. All told, strong recent trends mean the S&P 500 companies are on track to deliver their fastest rate of earnings growth since 2010. Having said this, investors remain undecided as to whether this positive news is already accurately reflected in share prices. Several companies that have convincingly beaten estimates have been met with lacklustre reaction in the stock market. Many have suggested that, by and large, money managers had predicted that companies would post impressive growth in the first quarter of this year because of easier comparisons against a tougher economic climate in the previous year and so, rather than be enthused by the strong recent growth, most are simply asking – what’s next?
The need for activism in retail
Discussing shareholder activism in retail at a roundtable event hosted by the Retail Marketing Society, some of the strongest minds in both investment and retail discussed the need for more active shareholders in the sector. Painting a picture of retail as being overridden by lethargy and entitlement, panellists including retail executives and investment bankers set out the case for why people should be supporting activism in the sector and not warning against it. Forbes has provided an overview of the criticism levied at retail leaders throughout the event, as panellists took aim at a perceived inability to react quickly, embrace technological change and monitor consumer behaviour. The topics of executive turnover and pay also made for enthused discussion, as the panel lamented a lack of churn across the industry, with executives clinging onto their seats and ever-growing pay regardless of their performance. Part of the problem, suggests Forbes, is perhaps how activists are characterized by the sector, typically described as pirates, obsessed with making quick profits and not with the long-term future of a company. If the retail sector is to cast away its many underperforming boards, such descriptions may have to be challenged.
ESG – not the place for outperformance
A recent study from Scientific Beta has called into doubt claims of positive alpha regarding ESG investing, stating that the analysis behind such claims is deeply flawed. Arguing that many other studies overestimate ESG returns, as a result of significant investor interest skewing short term results, this study claims that over a longer period of analysis, incorporating periods in which ESG was not at the forefront of investor interest, outperformance is not witnessed. The report also takes aim at what it sees as a lack of robust downside risk protection with ESG investing, arguing this is often overlooked by overzealous value investors. Covering the report, CFO Dive have framed the findings as part of a wider look at the state of ESG investing, which only last month was rocked by findings emerging from a tough period of scrutiny by the US Securities and Exchanges Commission (SEC). The Commission found that some funds and advisers may have misguided investors on ESG, providing weak and unclear documentation that did not safeguard against flawed disclosures or marketing information.
And finally… sell in May?
The old adage may dictate that one should “sell in May then go away” but with growth continuing at a rapid pace, buoyed by the release of capital by banks and the continuing injections of government support, why would anyone listen? Perhaps because things are as good as they are going to get, at least that’s the pessimistic view. The IR community has arguably played a part here in its failure perhaps to provide more convincing guidance; analysts no longer seem to believe in consensus expectations and even the companies that beat them have seen their share prices fall a little. As John Authers has put it: “This is very unusual, and suggests the market was at least implicitly expecting to be surprised (if that is possible). If earnings can trounce expectations to this extent without provoking a big reaction, it suggests that all the good news has been priced in”. Writing for Bloomberg, Authers warned that the strongest case for selling now is the actions of fellow investors, increasingly caught up in a wave of meme stocks, cryptocurrencies and the ever present tweets of Elon Musk.
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