Posted on June 18, 2008
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This has been brewing for a while but has reached truly absurd proportions. For those that don’t know technology companies divide their analyst "relationships" along the lines of industry (Gartner, Forrester) and financial (Goldman Sachs, Morgan Stanley.) This means that analysts talk to different people, attend separate meetings and receive distinct types of information and contact points in the company.
Besides having no real foundation in the first place, today this practice has taken on a mantle of irresponsible idiocy that remains somewhat characteristic of large companies. Here are the key reasons:
1. Why would any industry analyst disregard the financial and business aspects of a technology vendor? Why would a financial analyst attempt to do their job without a deep understanding of the technology, product strategy and other "technical" details of the business opportunity? Can one do a restaurant review using just the prices on the menu and not tasting the food? Can you write up the food and ignore the prices of the items? Silly.
2. Industry analysts are no longer distinct from financial analysts in terms of talking to public market investors. Gartner has a huge business built around serving up their analysts to discuss companies with investors. Firms like Gerson Lehrman blur this distinction even further. Everyone is part industry analyst, part business/financial analyst. Every single "industry analyst" firm we know has a substantive business where analysts service institutional investors.
3. Companies holding industry analyst meetings no longer provide any extra information that is financial in nature. They cite the "black out period" the same way they use it in financial analyst meetings. Another distinction without a difference.
Obviously companies have lots of stake when talking to analysts which is why they work so hard to craft their message and information to market the image they want analysts walk away with. Of course the primary job of the analyst is to find the reality and relate it to the needs of their own clients, not to grasp and simply repurpose the information.
Analyst meetings are certainly valuable and should continue. But they should be open to both types and a detailed agenda allows analysts to decide how well the program fits with their needs. Pure financial types may elect to skip product briefings and industry analysts may pass on the CFO presentation if there is one.
We realize that the "blackout period" is a dumb invention to comply with "FD" regulations but since there is no objective definition of it nobody knows how to use it intelligently. CXO executives refuse to talk to financial analysts for long periods while customers and prospects continue to get detailed information and participate in regular briefings with the company. All it does is prompt analysts to develop relationships with the clients, channel partners, competitors and prospects for a company which end up being more useful anyway. However company managements lose out because they miss the advice they can get back from analysts who spend time with clients, prospects and investors. The dialog is greatly reduced. Some companies actually pay over $100K for "advice" on how to script their quarterly calls but do poorly at understanding expectations.
We could certainly go on but today most of the problems don’t impact us anymore now that we are outside the oppressive and unproductive broker/dealer research sector but the industry/financial analyst distinction gets more silly every day.
– Kris Tuttle
Tags: Research, Company Managements, Analyst Meetings
Posted on June 11, 2008
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We love Amazon as a company. However last year the abrupt move from $40 to $80 caught us off guard.
We’ve watched it closely and continue to like it but… lately there have been some major outages. Not just the ones that got headlines but quite a few more.
Speculation is out there about what might be going on but facts are few. If Amazon is having infrastructure problems we have no doubt that they will figure them out and come back as strong as ever. However until we know more we think it’s best to avoid the shares. In fact we just took out a small short position.
Amazon is all about their infrastructure and while web services have not been impacted as far as we know they are certainly losing business from the public and the non-public outages.
In addition we might be in a bit of a lull as we enter the summer season. Kindle is very interesting but it’s early for it to move the needle much. Also other firms, like Google, are entering the fray with potent alternatives to Amazon EC2 and S3.
Valuation is an issue here as well with the stock trading at levels that leave it vulnerable to selling in a rough market looking for excuses. Any more outages or other issues could send the shared down sharply.
We remain long term buyers on Amazon as a company but are keeping a neutral/negative postion for now.
– Kris Tuttle
Posted on June 11, 2008
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Juniper is a company that has amazed us with their ability to execute in a hyper-competitive market.
However lately there are bits of data coming in that suggest they are facing some fresh headwinds. While they appear okay on the enterprise front the carrier business could be more punk. Cisco continues to execute very well in the carrier area and 2nd tier vendors like Nortel (NT) are even winning some business in place of JNPR.
The other major concern we have on JNPR is high valuation. At 5x sales and 30x earnings we find the stock at least 20% overvalued as we go into a period of what we expect to be somewhat soft conditions.
We prefer other names like Corning (GLW) on the networking side and Research in Motion (RIMM) on Mobile Internet.
[R2Capital is short shares of JNPR and long shares of GLW and RIMM.]
Posted on June 5, 2008
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A few days ago our friends over at New Constructs released their Most Dangerous Stocks for June list and we couldn’t help but note that SYMC was added to the large cap list.
The stock has had a great short term rally since we published our research note on April 30th, highlighting the challenges the company is facing in their core market according to their customers. We recommended it as a short but on a fundamental versus a trading basis.
With the stock up from $17 and change to about $21 we feel the short is looking more attractive. Our price target remains $14.
The company will be hosting their analyst meeting on June 12th and we expect more general enthusiasm around the meeting since management is very good at telling analysts and investors what they want to hear.
Insiders have been selling heavily with no buying. The CEO, John Thompson, has taken $3.5M out in May alone.
Sentiment on the name has improved but there continues to be room for more upside if management gets more analysts over to their way of thinking around the meeting. Despite the recent stock move analyst community is mostly at a Hold (20) with 12 at Strong Buy/Buy and 1 lone Sell rating.
We’re currently short the name but secretly hoping for some further share appreciation and further confirmation of our concerns on the fundamentals.
Anyone long or short SYMC should read the research note above as it contains quite a bit of customer data that loudly suggests management is out of the loop on the fundamentals.
– Kris Tuttle
Tags: SYMC, Short Ideas, Analyst Meeting
Posted on June 3, 2008
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We’ve been documenting a broad range of sources and services we have adopted to perform our regular research tasks. In the process we have hit upon what we think is an important question for us and anyone else who is actively investing capital in the public markets.
Years ago the hedge funds helped cement the concept of the "mosaic" for a particular stock idea or market condition. When looking at buying or selling a name these portfolio managers consulted a few sources that created a picture for them from a set of well defined aspects. The classic case was a set of inputs that suggested near-term business was tracking better than consensus expectations, insiders are buying, new analysts have been visiting the company implying that new coverage is coming, and the valuation is attractive. A set of consistent positive inputs means an informational mosaic that says "buy." As we have said many times before a successful analysis includes fundamentals (business trends), expectations (consensus thinking) and valuation.
There’s been a huge proliferation of information sources, sources that vary by type, scope and quality. There’s also been a continuing trend of increased specialization. Now institutions regularly consult firms like Gerson Lehrman for internal morale or insight on a potential investment, use another to do channel checks, get models and consensus thinking from brokers, bring in raw data from services like NPD, or Majestic, commission a custom survey, use a too like Bloomberg, or Reuters for insider transactions, lock-up expirations and so on. Some are using consumer services like Google and Yahoo more to get a retail view of stocks and the market. Add to that the growing number of interesting alternative sources of information like Monitor110, Covestor, Stockpickr and other ways to glean changes in sentiment or market adoption. The full range of sources often also shifts based on whether an institution is in "idea generation" or "due diligence" mode.
As we begin to document and semi-automate aspects of our own investment process we are forced to consider some architecture to pull these diverse and changing elements into our universe of knowledge and analysis so we can further optimize our portfolio and the quality of our decisions.
Every week we find and try to incorporate more good information sources, additional industry experts and smart people, different methods of getting and sharing information (first email then Skype now Twitter?)
We’re trying to incorporate a few overlapping layers and a fairly comprehensive view but even doing the basics begs for a simpler way to match fundamentals with consensus and valuation. Why aren’t the online tools better? Who has a simple and flexible architecture to put all these research elements in a context for decision making?
Better tools are needed. Right now it looks like we need to develop most of what we want ourselves. If nothing better appears we’ll produce them for the rest of the world when we are done. Meanwhile, we welcome any good ideas.
– Kris Tuttle
Tags: research, investing, technology
Posted on June 2, 2008
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When we left the broker-dealer/investment bank universe of equity research we could certainly see the industry would have to work through a large and painful transition to a set of new products and business models. Given the huge size of the "industry" our guess was that it would take 10 years to work itself out.
When we saw news of unbundling and new funding for research startups several years ago we thought that changes might start to come quickly. These initial positive signs seemed to just die out. Recently we mused that we may have been off by a factor. The industry seems like it may need 20 years to things out. After going back to the drawing board we have decided to stick with the 10 year forecast but admit that it’s going to be as back end loaded as an enterprise software quarter.
Thanks to a number of industry changes in the broker-dealer/investment banking world we are now getting the "Street" research we asked for. That is, no research at all. The lack of value has only helped to accelerate the devaluation of the work product and create a pervasive unwillingness to pay for research in general.
Today the only high returns available from quality investment research come from investment management fees. This is why so much of the growth in research staffing has been on the so-called buy-side over the last five years.
It’s true that there have been some new and successful models. The most well-known and now broadly imitated is Gerson-Lehrman. Although their use of an expert network available to investors is fairly obvious and has been tried before, their structure of nearly all variable cost business model have been the key factors that have made them successful. There are also hundreds of small independent research shops focused on verticals or other data segments that have been able to build reasonable though less famous businesses from the institutional investment community.
That said we are still sitting in a transition stage where the basic value proposition for sell-side investment research is seriously in question. There is no better testament to this than the recent restructuring moves at Morgan Stanley. In the face of serious progress in their research ranking (moving from #8 to #6) in the widely respected Greeenwich Associates study, they have terminated a large number of their senior research staff.
In several large coverage areas: oil and gas E&P, health-care services, and automobiles and components, the analyst teams had vaulted from rankings in the pack to #1 or #2 before being fired.
Imagine their surprise… you work for years at Morgan Stanley, crank away and in the year you break through to be the #1 coverage in your industry… they fire you along with several others who obtained the same success. If that doesn’t send a message of "research isn’t worth anything" I don’t know what does.
It also says that we are very much in the same place that we were for broker-dealer research back in 2003-2004. During that time a huge investment in research on the part of what was then Adams, Harkness and Hill was undertaken. Despite a new focus on improved research and a big ramp in the number and quality of the analysts, it didn’t move the needle. It makes no sense to invest heavily in an aspect of the business that clients are either unwilling or unable to pay for.
Where does that leave us in 2008? We have some uncertainly as to picking the starting year for this 10 year transition. It was probably 2000 at the earliest and 2004 at the latest. We do see some clear and undeniable evidence that industry conditions might be improving. (Not for research at brokers or bankers but for independents.) That would put our 10 year transition into 2010 or 2014. Based on some of the things we are seeing we are expecting it to be closer to 2010.
Some investors are getting smarter. They are beginning to understand that they need to look beyond the consumption of analyst reports and meetings with company management if they hope to outperform. Under-performance has become more of a problem thanks to increased transparency and the rise of easy alternatives like ETFs. At the same time many firms are introducing new and useful research products based on data and facts that can be tied directly into business trends and future shifts in company fortunes. We’ve also seen a dramatic increase in the straight up payment for research versus so-called soft-dollar on trading commissions.
We’re working with some of these emerging data and fact-based research organizations to incorporate their information into products that are unique and of great value to institutions. By combining proprietary and meaningful data, industry expertise and insight, and financial/stock analysis we generate the type of product upon which performance-enhancing investment decisions can be made. It takes all three.
In conclusion the move by Morgan Stanley may mark the turning point for research. It signals that the current system is so broken that what is touted as a great success leads to the elimination of the effort. Reportedly Morgan Stanley is even taking a pass on subscribing to more detailed information about how their research group is performing. Adding a form of "we don’t care" to "it doesn’t matter."
To anyone not familiar with the modern sell-side research effort in a broker dealer, getting to be the number one team involves covering the largest and most well-covered stocks in a group and then setting out to market yourself to every large institution to that votes in the annual survey. It’s a ton of work. One has to be up on every blip and nuance surrounding an industry or a stock. It requires encyclopedic knowledge and hundreds of calls a week to voting institutions. Of course this leaves little, if any, time for actual research, finding new ideas, helping people really make money in stocks. But then again that’s the sell-side research we deserve. At least Morgan Stanley has made some moves that might bring the charade to an end.
– Kris Tuttle
Tags: Research, Wall Street, Sell Side, Morgan Stanely