Investor Relations in a Downturn

The stock market is doing well right now, but many of the gains are fairly concentrated in a small number of stocks. Many companies are struggling as a result of cycles in their corner of the industry or problems with their own products or a host of other factors. For instance, in semiconductors, companies exposed to consumer markets are starting to do well after a year of suffering, and now it is the turn of companies exposed to industrial markets to take their turn at missing earnings and lowering expectations. How do companies navigate this, especially in a market where anything without AI in the name seems to struggle to gain the market’s affection?

We write a post touching on Investor Relations (IR) topics every year or so, and we usually write it in the context of thinking through the options for a recently IPO-ed company, but there have been so few IPOs this year that we are going to look at the problem from a slightly different angle. Along the lines of how companies can maneuver during an industry downturn. A lot of companies are facing this – interest rates are still high and economic growth is proving unconvincing in many places around the world. At some point, we will come back to this topic with a thought to how companies can accomplish this in a world with permanently higher interest rates, but we still have to figure out what the playbook is.

A big part of the problem right now is that many investors are still trying to get a grip on what the economic sheep’s entrails mean for their portfolios. For their part, the venture community is still trying to work down its past excesses and remains mired in that painful process. Public market investors have much more tangible metrics and clearer goals for situations like this. That being said, too many investors still seem to be chasing patterns left over from the bull market in the early 20’s, when buying on any pullback usually resulted in positive outcomes. With the Fed now largely in Maintain Mode, the focus should turn back to finding stocks that can outperform their peers if not the entire market.

One temptation many companies encounter during downturns in their earnings is to hunker down – cut back on road shows and investor meetings. The argument goes that there are enough problems to do deal with at headquarters maybe that is a better place for executives to spend their time. We think that is a mistake. Running the business should always be the CEO’s number one priority, in markets good and bad, but a close second is communicating to investors.

The critical factor in this is before speaking to investors those CEOs need to have a good sense of how their business is actually faring. If conditions are worsening tell the Street. The worst thing CEOs can do when their business is highly uncertain is to go out and promote it heavily. A more sober, measured response is required. This is surprisingly hard to for many CEOs to do. They often feel their job is to be the number one Hype Person for their stock, to tell the world loudly how great the business is. Shifting to a more subdued gear can be difficult. The risk in this is that investors will hear the good news, buy the stock and be sorely disappointed at the next earnings call. That kind of sting lingers and when business finally does improve the burned investors are not going to come back.

The formula management should use is some variation of “We have a great business, but times are challenging.” That second clause is crucial and should be mentioned in every paragraph if not every sentence. In fact, we would encourage CEOs to spend most of their public comments talking about near-term headwinds and tactical issues, only to conclude with a comment about “We will overcome this because we built a great business.” Investors with short attention spans will hear all the negativity first, with no risk of them getting confused.

This may sound overly negative. Executives tend to believe strongly in their teams and their own work. Downplaying that seems to cut close to insulting themselves. The thing to remember is that when times are tough the currency that matters most to the Street will be credibility – not earnings, not growth, not miracle products – the knowledge that the person running their company is honest.

The goal in all of this should be to emerge as a company that knows how to weather difficult times. Investors will value this highly, and then they will recall all the things the CEO said about the ‘great business’, and once that start to emerge in results, greed will kick in and investors will return.

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