IR Monitor – 26th April 2021

This week’s news

“No one wants to get their head ripped off by a short anymore.”

According to the latest data from Goldman Sachs, Reddit’s Wall Street Bets revolution has left a lasting impression on Wall Street’s bears. Despite US stocks and valuations trading at almost two-decade highs, the median short interest in members of the S&P 500 from hedge funds currently sits at just 1.6% of market value, a near 17-year low. At the same time, hedge-fund longs are around the highest relative levels in years. Fortune has suggested that optimism over the American economic reopening and stimulus package has driven global equities to new records and – in the context of January’s day-trader induced losses – smart money presently lacks the confidence to bet against expensive or “deadbeat” companies.

Lofty expectations set tough task for US corporate earnings

In the US, where corporate earnings season has officially begun, analysts are expecting nothing short of a spectacular rebound in companies’ Q1 results. But, the rather lofty outlook leaves little room for disappointment and could prove a stumbling block for US equity markets, which have been rallying to all-time highs off hopes for a swift economic recovery. According to the Financial Times, as of April 9, Wall Street had pencilled in 25% year-on-year earnings growth for companies in the blue-chip S&P 500 index. If those expectations are met, it would mark the strongest quarter since 2018. But because companies tend to beat estimates, researchers at FactSet think real earnings growth could be 28% or more, the highest level in more than a decade. Randy Frederick, vice-president of trading and derivatives at Charles Schwab, stresses caution, “If the optimism gets too high, even in a really good earnings season, the market could actually go down because there’s a lot fewer upside surprises… To me, that sounds like a climate that’s ripe for some sort of pullback.”

Stock buybacks set for a big return 

MarketWatch has reported that US corporations across a variety of sectors are sitting on a big pile of spare cash – and that analysts expect them to use it on stock buybacks. A new S&P Global report indicates that investment-grade companies ended 2020 with median cash and cash equivalents near 33.3% of their liabilities. While slightly below the median pandemic cash peak of 34.3%, this is far higher than the 19.3% seen before the pandemic. In light of reduced Covid-19 fears, stemming from a successful US vaccination programme and an ongoing economic recovery, Michael Arone – State Street’s chief investment strategist – believes companies will deploy these funds on stock buybacks. He predicts buybacks will increase 30% in 2021 from last year’s reduced levels.

Publish consensus on your website and investors will thank you for it

Only 42% of listed companies in the UK publish earnings consensus on their websites, according to the IR Society, and even fewer publish cash flow and net debt estimates. Andrew Ripper, head of IR and a former sell-side analyst, argues that investors need access to consensus estimates in order to fully understand market expectations for key financial metrics and to properly value a company’s shares. Ripper argues that it is best practice for companies to communicate estimates to the market, and that all listed companies must play a proactive role in “collating, maintaining, and communicating” consensus estimates. Whilst there is no standard template for what to publish in consensus or for metrics relevant to a business, Ripper notes some simple guidelines to follow, including ensuring that consensus is easy to find, providing at least two years of estimates, as well as publishing cash flow, net debt, and profit and loss estimates.

Top auditors criticised by advisory service for corporate fraud failings

The Times has reported that Pirc, an advisory service, is recommending that investors vote against the reappointment of PwC, KPMG, EY and Grant Thornton at any British company where they are the auditor. Pirc has adopted the position, the article says, because it believes these auditors have failed to make serious enough efforts to improve their fraud-detection processes. Comparably, the service said that Deloitte, BDO and Mazars had made adequate commitments when it comes to corporate fraud. One of Europe’s largest independent corporate governance and shareholder advisory consultancies, Pirc wants to force accounting firms to address what it sees as an “expectations gap” between the professional standards set for the industry on fraud and what the public and legal system expect. As it stands, auditors are expected to adhere to the principle that certified information is “useful for users.” Pirc believes this “side-steps the crucial duties auditors have”.

And finally… “If you describe an exec as ‘unfeasibly tanned’ in a research note”

Occasionally, senior managers of public companies meet with their big shareholders. As shareholders own the company and the managers work for the shareholders, this makes complete sense. The shareholders should be able to tell the managers what they think, and the managers should have to explain themselves to the shareholders. But it can also be really quite awkward due to the securities laws that try to give all investors a level “informational playing field”, where corporate managers are not supposed to tell big favoured shareholders material non-public information without disclosing it simultaneously to everyone else. In his column for Bloomberg last week, Matt Levine discussed “mosaic theory” whereby the managers don’t tell the investors anything material, but they tell them lots of immaterial things that somehow add up to materiality. Even gauging an executive’s sun tan may be of some use. Looking at ‘The Benefits of Access: Evidence from Private Meetings with Portfolio Firms’ (a paper by Marco Becht, Julian Franks and Hannes Wagner), Levine unsurprisingly finds that for an active stock manager, meeting with companies is useful: after meeting with a company, an investor is more likely to make a trading decision, and that trading decision is more likely to be good.

Webinars

28 April: Business Services Spring Summit, Houlihan Lokey  (Virtual)
28 April: European Life Sciences Gene, Cell, and RNA Day,  Kempen & Co (Virtual)

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