Heady game of stock surveillance
It’s hard out there for a stock watcher on the Street. Many of their traditional information sources have dried up, and their industry has been the subject of SEC investigations in the US. And with moves in various markets to increase shareholder transparency, the stock watcher’s business model is at risk.
But IR continues to hanker for faster and better information about who is buying and selling stocks. According to a global survey on shareholder transparency commissioned last year by the International Investor Relations Federation (IIRF), there is a clear appetite for change among investor relations professionals frustrated by the challenges of identifying who has ownership of their company’s stock. Eighty-one percent of the 346 investor relations officers polled would like the IIRF to push for greater transparency, according to the survey.
‘I am a big supporter of increased shareholder transparency,’ explains Derek Cole, director of IR at Denver-based biopharmaceutical company Myogen. Cole calls for monthly reports from institutional holders. ‘By the time you see them, 13Fs are dated, and many companies basically spend an entire quarter not knowing who they should be talking to – and that’s a detriment to the market.’
While he has used outside firms for project work in special situations, Cole is not a fan of ongoing stock surveillance. ‘I don’t know how exactly they obtain their information or whether it is accurate,’ he says. ‘Getting information around critical events can be important, but on an ongoing basis the rather substantial costs involved in stock surveillance relative to my budget do not constitute a value proposition. When I can get dated information through a free mechanism, I would much rather spend the money on travel and direct outreach to the buy and sell sides.’
Weighing options
Along with 13Fs, Cole gathers shareholder information by consulting the Nasdaq market intelligence desk as well as leveraging the company’s banking relationships. ‘Your stock’s market makers have no incentive – and probably a disincentive – to provide you with any information,’ comments Cole. ‘There’s nothing in it for them. On the other hand, our banks’ trading desks can be a quick and informative source for color and insight on market sentiment.’
Elizabeth Corse, IR director at small-cap IT utility services provider Savvis, knows that it’s mainly hedge funds and retail investors in her company’s stock. ‘My company is not only a small cap, with a share price hovering around $1, but it also has a challenging capital structure,’ she says.
Corse targets investors by working with Savvis’ single sell-side analyst, combing through 13Fs and contacting ‘anyone who will talk’. She measures IR success in a similarly straightforward manner. ‘Most people will tell us, on the phone or in the meeting, whether they’re potential buyers,’ comments Corse. ‘If their eyebrows fly up when we get to the capital structure discussion, I can be pretty sure they’re not near-term prospects. If they do buy stock on the fundamentals, they usually let me know – with commentary on changes they’d like to see.’
It’s personal
One thing many IROs agree on is that the particular stock surveillance firm you hire matters less than the individual assigned to your account.
‘Lots of firms can provide you with an analytical service where you can plug in numbers and run it,’ says Robert Borchert, vice president of investor relations and corporate communications at Georgia-based Per-Se Technologies. ‘But when senior management asks, What’s going on with our stock today?, you need to make that phone call and you want to feel comfortable that your contact is giving you good insight and good market intelligence.’
Borchert notes that sharing information plays an important role in ensuring his service provider makes the most educated guesses possible. ‘If one of my sell-side analysts calls and says he’s heard from three hedge funds, I’ll tell my surveillance partner,’ he says. ‘She can take notes and then match things up.’
Chuck Graves, finance director at medical and surgical supply company Owens & Minor, agrees. ‘While technology is important, a great deal of a stock surveillance firm’s value lies with the person working the account,’ he says. ‘Our man has been on the account for a number of years and possesses a great historical knowledge base that has worked to our advantage. If he left the firm, I’d have to reevaluate how valuable the service was to us.’
Stock surveillance involves an increasing amount of guesswork, and Graves’ surveillance partner sometimes gets it wrong. ‘But he gets it right more often,’ Graves says. ‘We find out at the end of the quarter when he marries up the position in synch with the filings.’
Measuring success Meanwhile, Graves uses stock surveillance to measure the effectiveness of his IR program. ‘It is helpful as a follow-up to see whether the folks you are meeting with actually made a buy or sell decision,’ he says. ‘If our message isn’t resonating, we can adjust it.’
‘Stock surveillance helps me measure my success in getting my message across to institutions,’ adds Martin Cohen, head of US IR for business software provider SAP. ‘It’s always good to know who your shareholders are so you can see why they are buying and selling.’
While people tip the value equation scale in terms of stock surveillance, it’s technology that shines when it comes to applying that knowledge to the challenge of investor targeting. ‘Targeting software has become much more sophisticated over the years,’ says Cohen. ‘Service providers now provide tools that make it easier to target institutions based on a whole range of techniques and criteria.’
‘The huge amount of effort now being spent on targeting databases is a direct result of the decrease in sell-side analyst coverage,’ adds Cole. ‘Without access to that coverage, companies are spending more time going directly to the buy side. Consequently, they need that targeting help.’
Getting on board
Across the pond, more UK firms are seeing the value of stock surveillance and targeting. Having recently revamped its IR department, Tullow Oil is now ready to better understand its shareholder base.
‘We began by improving our communications – making sure we got the right messages out to the market,’ says Chris Perry, group IRO at Tullow Oil. ‘Now we are ready to be a little more targeted with those messages. Until now we had been using our brokers for targeting, and they have been quite good at it. But we want to be more proactive internally to better understand our own shareholder register.’ As part of that process, Tullow Oil plans to analyze its shareholder register on a monthly rather than a quarterly basis. ‘There can be significant changes over a month and having more up-to-date data represents only an incremental cost. We’ve grown significantly in recent years, and it’s good to look closely at your shareholder register as it evolves. This will give us a further feel for how we should be carrying out our investor targeting.’
Ultimately, the use and value of stock surveillance is predicated on the sophistication of a company’s IR program as well as other internal factors such as shareholder structure, market cap and available public float.
Even with a budget, a one-person shop may not have the time to make use of a shareholder identification and surveillance program with all the bells and whistles. But a larger group can leverage the depth of data now available.
A company just getting its IR house in order is likely to have other priorities, but companies that have a long-term view of IR strategy and are less fixated on short-term events are well prepared to take full advantage of surveillance.
Whatever a company’s situation, there is still no single comprehensive source of shareholder information – and chances are, there never will be.