News is neither good nor bad but a string of data points on a long road
A client recently questioned why Catalyst would recommend sending out a release to our stakeholder list when it contained ‘bad news’ – namely, a pre-announcement of disappointing results. It’s a valid question so we are sharing our advice.
For investors, the guiding rule is to keep them informed as they are owners of the company and all news (good and bad) is important. News flow is also valued as it drives stock prices in the short and long term. A regular stream of news helps build trust that a company is keeping you well informed. Seeing that a company doesn’t cherry pick its news flow reassures investors that they don’t have to wonder whether something has happened behind the scenes – particularly if the share price is volatile.
In the long term, news is neither good nor bad but a string of data points on a long road that keeps investors informed and updated on a company’s outlook. Good and bad news triggers buying and selling, which equals liquidity – a critical aspect of public investments. How we deal with these business data points can also affect buying or selling, or provide comfort to keep holding.
Knowledge and the comfort that you are being made aware of key factors is what enables investors to remain engaged in a stock. Uncertainty about what’s going on in the business or concern that management might not be fully transparent on major issues causes smart investors to exit, as they recognize they are handicapped in their decision-making.
We regularly counsel our clients that it’s better to deliver bad news quickly and with full transparency than seek to delay or hide it, because the impact of the news will become apparent eventually in either case. There is no denying that bad news will cause some investors to sell some or all of their stock – but if you’re transparent about it, the credibility you build by being forthright makes it far more likely the investor will re-enter your stock when the issue is behind you.
If, however, investors feel surprised or misled by management due to omissions or delay, it’s highly unlikely they will ever return to your company – and their negative perceptions can travel to other investors. Remember, Wall Street is a close-knit community.
Getting back to the issue of distributing unfavorable, we offer similar advice. Because most industries tend to be very insular fishbowls, news travels at great speed – often aided by your competitors!
Given this reality, can you realistically believe you can succeed in sharing only good news and trying to suppress the bad within your industry group? Is it realistic to assume that people might not ever learn about it if you try to keep something quiet? Of course our answer is ‘no’, and it’s backed by experience.
With respect to Wall Street, we strongly recommend getting ahead of the rumor mill by:
1) Moving as quickly as you can
2) Framing the message in your own words and with proper context
3) Putting the news in investors’ inbox and pushing it to the channels investors and analysts monitor
4) Following up with key analysts, investors and media to make sure they saw the news
5) Being available and proactive in addressing the inevitable uncertainty and questions from key stakeholders.
This approach should lead to better responses to disappointing announcements because the communication will best reflect the perspective and balance you provided. It should also help accelerate putting the situation behind you and, importantly, it just may remove a motivation to sell prior to more broad dissemination of the news/rumors. In other words, it helps to inoculate you from further impact by eliminating any perception of acting before the news is fully reflected in a share price.
Thinking from the investor’s standpoint, it is far better – and less scary – to learn of challenges from the company itself. Certainly, we all learned this lesson as kids when confronted with disclosing the small dent in the family car! This requires prompt and clear communication, and requires a policy of sending out all newsworthy announcements with the same policy.
In the end, we know your most important constituencies will likely be influenced by how you handle such situations. We believe your credibility stands to benefit from open disclosure – so why risk the reputational damage of being viewed as less than forthright with Wall Street?
The IR marathon
In closing, our experience has shown that success in building relationships on Wall Street is a marathon, not a sprint, and you need to maintain your pace both uphill and down. Persistence and balance is required to reach the finish line, and along the way your fan base will grow if you build the right profile.
If investors sense communications inconsistencies, however, Wall Street interest can disappear overnight without a word. While this silence can be mistakenly viewed as success for a less-than-forthright strategy, the more telling disappearance of shareholder capital from your equity, along with polite declines for future meetings, is the true consequence of failing to execute credible IR communications.
David Collins is founder and managing director at Catalyst IR, where this article first appeared