The Speculator
When CEOs call a
meeting, buy the stock
When facing industry analysts,
chief executives like to have something positive to say. Afterward, their stock
usually goes up -- so schedule your purchases accordingly.
By Victor
Niederhoffer and Laurel Kenner
For want of a hip, an investment battle was won, the Spec Duo had a meal
for a day and the Speculator’s readers may eat well for a lifetime. The story
starts three years ago, when Vic was so hobbled by a bad hip that he had to
roll down a hill to get to the court for his daily tennis lesson, where he
practiced rooted to one spot. Finally, he decided on a hip replacement
operation. Turned out the hip is made in England, and Laurel was dispatched to
investigate the manufacturer, Smith & Nephew (SNN, news, msgs).
Laurel called Smith & Nephew and explained that
she was a columnist and would like to interview the chief executive. The
receptionist told her that executives were unavailable for meeting anyone from
the colonies that day, because they were very busy with plans to take a group
of analysts on a tour of the company’s factories in a big former colony. The
Specs are never deterred by a lack of status, however, and Laurel managed to
garner a 20-minute interview. Over tea with the chief executive, Laurel learned
that Smith & Nephew is a venerable, rather productive company with
thousands of patents and products. It seemed plausible that the executives
would put their best feet forward during their trip to the United States. The
Spec Duo bought the stock immediately, held until after the analyst tour and
made some good money.
Fast forward to May 19, two weeks before a meeting of the American Society
of Clinical Oncology. Genentech (DNA, news, msgs) announced it had good test
results to report on a new colorectal cancer drug. Genentech skyrocketed 44% on
the 24th Annual Healthcare Conference at the Ritz Carlton in Dana Point,
Calif., where the golf isn’t too bad, either. Elsewhere on the same day, Bear
Stearns (BSC, news, msgs) was holding a technology
conference, Deutsche Bank (DB, news, msgs) hosted an electric power
conference, CIBC had a technology summit and Merrill Lynch (MER, news, msgs) threw a Global
Transportation Conference.
The physical meeting, as opposed to the conference call, is an excellent
venue for the practice of the techniques outlined by Robert Cialdini in his
masterful "Influence: Science and Practice." As Cialdini shows,
people are more amenable to suggestions and requests made during meals, or by
attractive people,
The tendency for stocks to
rise around the time of such conclaves seemed like the kind of thing someone
might have made a good study of. Bingo. Yes, a study by BEA Associates fund
manager Patrick Regan, reported in the May/June 1980 Financial Analysts
Journal, considered the price moves of 1,106 companies around the time of
announced meetings before the New York Society of Security Analysts. The
companies outperformed the S&P 500 ($INX) by a substantial 2% in the
month before the speech. A chart below shows the results.
Imagine
our surprise when we found that the authors actually disclosed the uncertainty
of the results: that it was only one chance in 10,000 that the observed
differences between the companies' performance and the S&P could be
attributed to chance. The study was based on work done in 1971 by Regan, then a
University of Chicago student, and his professor -- a certain Dr. Niederhoffer.
Since quite some time has gone by, we decided to update the studies of the
1970s and 1980s. After all, if a tendency is widely known and believed, then
the market will move so that only professionals with low transaction costs and
very ample supplies of credit can profit from it.
So meetings really matter?
The book "Meetings, Manners and Civilization" by Wilbert Van
Vree contains an extensive discussion of the civilizing role that meetings have
played throughout history. The author points out that the production of ever
more refined rules led to an upper class of professional meeting-presenters and
listeners. Certainly one of the highest forms to which this process has evolved
is the presentation before the New York Society of Security Analysts. Founded
in 1937 by Benjamin Graham, the legendary “father of securities analysis” whose
legacy we have scrutinized in our book, "Practical Speculation," the
NYSSA instituted regular meetings that became the prototype for today’s
plethora of conferences by investment banks, brokerages and banks.
NYSSA conferences are the subject of extensive media coverage before and
after the meetings. Announcements appear in newspapers and on news wires
beforehand; transcripts are available soon after. Executives and analysts
commit a tremendous amount of time and money to the meetings. While violent
declines for bad news are still prevalent, they tend to be counterbalanced in
large measure by rewards for good news. And thereby hangs a system.
In our updated study, we noted that individual company presentations
before the NYSSA have become much less frequent. Once daily occurrences, there
is only about one a month these days as they have been displaced by the
numerous brokerage house conferences, where more informal networking is
possible. Nevertheless, we looked at each of the 26 individual presentations to
the NYSSA from 2001 to 2003. We found that these companies went down an average
of 6% during the 80 days surrounding the meeting (40 days before and 40 days
after) versus a comparable 9% move down in the averages during the same period.
Thus, although the companies went down in price during this period (and which
didn’t?), they still performed 3 percentage points better than the market—a
result that was about a 1-in-10 shot by chance alone.
We also looked at industry
presentations before the society. These, too, occur about once monthly, with
three to five companies making presentations on those days. Again, we looked at
all presentations from 2001 to 2003. The results here were much more
encouraging. In the 20 days surrounding the meeting, the companies making the
presentations went down an average of 1%, but this was a full 6 percentage
points better than the comparable moves of the market during the same period.
The results are so strong that we can be 95% confident that the actual margin
of superiority of the presenting companies during this period was between 2%
and 10%.
All of the studies -- two
from the 1970s and 1980s, and our own recent efforts -- support the wisdom of
taking fliers in good stocks as soon as you know that they’re preparing a
conference presentation, then holding them for a reasonable, relatively short
period. Based on our results, we are tempted to posit a new adage: Buy well
before the conference presentation and hold for 40 days thereafter.
Regrettably, most of the high-powered members of the New York society seem
to be on summer vacation, and no conferences are scheduled for the summer.
However, we note that a meeting on resume and research report writing is
scheduled, so perhaps it is good to go long these skills.
Final note
We wish to thank Duncan Coker and Sri Viswanath for their research help in
these studies. Also, we welcome the financial world debut of Emily Novik,
granddaughter of Sam Eisenstadt, research chairman of Value Line for the past
60 years. A complete workout of our results is available on our Web
site. Readers who will be in New York at 1 p.m. Sunday, June 29, are
cordially invited to attend a meeting with the Spec Duo at the Central Park
Conservatory Garden, 105th Street and Fifth Avenue. We answer all
correspondence, critiques and compliments; please e-mail
us.
Final, final note
We just came across a file of reader correspondence from March, S&P
500 circa 790. “Bullish on stocks? You must be kidding. Go to hell,” read one
missive from a dissatisfied reader. We got so many of those. People tend to be
less flexible and open-minded than they should be in their recent state of
mind, be it optimistic or pessimistic. When the market is down and war is on
the way and experts say the prewar rally is already over, people tend to be
angry and bearish. When good news is anticipated, they buy. The truth is, the
best time to move forward is when things look bad.