How CEOs Talk to You
Communicate well or meet my evil twin
In my world, the only metric we have to judge a management team is whether they can meet the timelines they set out for the development of their product. These timelines, by definition, come more often than trial data. Calendar-based predictions on when a trial will be started, when enrollment finishes, and when data will be reported are the typical three timelines that happen for each really salient news item. Because we have no sales, profits, or other commonly recognized metrics to value stocks in the dev-stage biotech world, management guidance on timelines is pretty important.
Sadly, most CEOs in the biotech space have absolutely no idea how to properly communicate timelines to investors. They are always too optimistic. Always. So, we have learned to add a few months to what management has said to give them and us some cushion room.
Unfortunately, that cushion is uncommon. Most analysts take management at their word and publish timelines at (or ahead, oddly enough) of management's guidance. When the inevitable miss occurs, the stock gets clobbered and management gets an earful from their shareholders.
One would think the common reaction to such an experience would be for the CEO to be extra careful next time he or she opened their mouth about a timeline. Nope. The usual reaction, typically to a really bad miss that really torches a stock, is this:
"We are no longer going to provide timeline guidance."
I have a hard time finding the right adjective to put before "stupid" to properly describe this attitude. "Incredibly stupid" doesn't quite describe it. "Astoundingly stupid" is close, but still not there. Perhaps "Supercalifragilisticexpialidociously stupid" is the right phrase, but that makes most people's eyes hurt and I'm not sure Mary Poppins would approve anyway.
You see, CEOs are really saying something different when they pull guidance as a policy. They just don't think we're smart enough to read between the lines:
"Those dumb analyst SOBs and bothersome shareholders never give me credit for hitting a timeline and always give me grief when I miss them. So I'll show them and not give them timelines!!!"
I call this the "I don't like your rules so I'm taking my ball and bat and going home" attitude. It shows about as much class, anyway.
In line with the stupidity of the concept, it never works. Bulls make up unreasonably quick timelines and bears make up unreasonably long timelines. Nature abhors a vacuum and analysts are no different. Filling this vacuum is something of an unspoken sport, actually, generating a guffaw or three around the bar when you get more than a couple of analysts in one place.
The guaranteed result of such behavior on the part of CEOs is a further decline in the stock price. Punishment from missing the timeline is compounded by selling due to uncertainty. The longer the uncertainty continues, the higher the short interest and the lower the stock price goes.
It always ends the same three ways:
The company fails
Management is replaced
They relent and issue guidance
After Reg. FD went into effect, several whiny-ass executives decided they didn't want to play ball by the new rules. They bravely announced, often to much support by certain investment bank analysts who got used to being fed financial models, that they would no longer be issuing earnings guidance because of the "danger" of violating Reg. FD. Sometimes they even pontificated about how the decision would actually improve the performance of their company because they would be able to focus more on the "long term" now that they did not have to worry about the "tyranny" of having to make the quarter's numbers.
What a load of hooey.
For most companies, that lasted about two quarters. Analysts who previously had financial models fed to them now had to come up with their own. The resulting estimates had no feedback loop in them, so they were often out of touch with reality. Yet management teams were expected to meet the estimates anyway. When they didn't, the line "those weren't our estimates" didn't help their shrinking share price.
So, we got earnings estimates again.
It seems appropriate to bring this up today given this is exactly what Google (GOOG) managed to do to itself last night. One could argue they posted great numbers, but a fair percentage of their market cap will be erased anyway because they did not properly communicate with investors. Whether through arrogance or naiveté, they hosed their own shareholders by not offering guidance.
Over the course of the last 7 years, I've sat down with a handful of management teams to explain to them the value of effective communications with shareholders. Sometimes these meetings are confrontational. Some people take offense when I tell them they are the reason their stock price sucks. Our relationship with that company usually goes downhill from there. Other times the people on the other side of the table say, "We had no idea!" Then things get better.
Want to know a little secret?
You can accurately predict the future price direction of the company just by their reaction to that conversation. If they are open to the ideas and make changes, their stock price goes up. If they are angry and defensive, down it goes.
100% accuracy (so far).
This has nothing to do with the advice I give them. I'm not a communications genius. It simply is a reflection on whether management recognizes there is a game that has to be played. I never met anyone who could consistently win a game they refused to learn anything about.
Timeline guidance or earnings guidance. That's the way the game is played. Your portfolio will benefit if you can avoid those who refuse to figure that out.
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