Investor Relations:  The Long Conversation

If a stock shows a significant positive change in revenues or earnings with an attendant rise in the price, do you believe portfolio managers will be moved to buy it?

Conversely, if there were a significant negative change in earnings or revenues, would they short or sell it?

Chances are the portfolio manager would not buy or sell.  They would observe, they would take in the new data points, but that might be it.

Remember, a managed fund portfolio might have 50 to 100 positions.  Some have even fewer.  The point is, adding and subtracting positions is the most carefully considered activity a portfolio manager undertakes.  It is, in fact, exactly what they are paid for.  As a result it’s unlikely they will make a change based on a singular data point.

Unless . . .

Unless of course, the company in question has waged an investor relations effort over the past several years focused on proactively targeting specific investors and educating them on the development of their company.

When that groundwork has been laid, dramatically rising (or falling) earnings are not single data points in isolation, but rather data points in context.  Acting on a single fact is harder to defend than acting on a historical collection of facts.  Accordingly, proactive investor relations and education favors buying, while the opposite favors inaction.

Meeting and educating investors sounds easy but it’s not.  Investors guard their time.   They are known to say to CEOs, CFOs and IROs, ‘If nothing has changed since we last met, we’ll take a pass.’

As one CFO I worked with said, “This is a business of kissing frogs, or trying to kiss them.  I might have to kiss 1,000 of them before I find a prince.”  That said, the leverage in such efforts is palpable, and when the business prospers, well worth the effort.

ps:  While it’s fairly easy to predict how portfolio managers will react to new data, it’s impossible to predict how hedge fund managers might react.  With hedge funds, it’s anyone’s guess.

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