Interpreting CEOs' Comments on Their Own Stock ('The Dick Davis Dividend' Book Excerpt)

by: Dick Davis

An excerpt from the new book 'The Dick Davis Dividend: Straight Talk on Making Money from 40 Years on Wall Street' - reprinted with permission of the author and publisher:

• • •

CEOs On Their Own Stock

There is an important distinction between prospects for a company and prospects for the stock of that company. One can be good and the other can be bad. All the good things management says about the company may already be reflected in the high price of the stock which may, in fact, be due for a fall.

The head of a company is often the worst source of advice regarding his own stock. His focus, understandably and rightfully, is on the operations of the company, and his appraisal is based on an intimate knowledge of the company and the industry, not the stock market. If asked about the stock, the CEO will typically respond, “I’ll leave that to Wall Street.”

It’s not that the CEO is not interested in the stock. Getting the price up and keeping it going up is a top priority. Not only will a rising price keep stockholders happy but his own compensation is often tied contractually to the performance of the stock via the exercise of options. The CEO will often express frustration and puzzlement over the disconnect between what he sees as rosy fundamentals and the depressed levels of his stock. Most CEOs have less than a sophisticated grasp of the myriad of factors that can infl uence a stock over and above the fundamentals.

In dealing with management interviews, the investor has two problems. First, much of what is said is predictable. Things are either good or about to improve. The executive has to believe that (at least publicly) to please stockholders and keep his job. The CEO has an agenda — to make good news sound even better and to put other news in the most favorable light. Everything he says may be perfectly true but you rarely get the whole story. The focus will be on the items in column A (bullish news and the rewards that will follow) rather than the items in column B (bearish news and the risks involved). Instead of a balanced, even - handed pres- entation, the interview turns out to be little more than a PR release with the usual corporate spin. Some reporters are better than others at asking the tough questions. But all media has the same two restrictions: Like politicians, CEOs are adept at dancing around hard questions, and reporters don’t have enough airtime to press. Also, reporters usually don’t want to risk offending guests for fear of closing the door to future interviews.

CEOs are not in the business of directly recommending their company’s stock. Invariably, however, the clear implication of their favorable remarks is that the stock should be bought without regard to its present price. If, indeed, there has been a sharp run - up, there is no tempering of enthusiasm. This constitutes the second major problem for investors in evaluating CEO remarks. Corporate executives are likely to be equally bullish about their stock whether it’s at 20 or at 80. There is never acknowledgment that all the great things they are saying may already be refl ected in the price of the stock. As much as the CEO knows about his company and industry, that’s how little he knows or wants to know about the stock market (there are always exceptions, of course). It behooves investors to be aware of this and to remember that the stock of even the best company with the best prospects should be bought only if it’s reasonably priced.

“We do not talk to management.
We know management is lying
when their lips are moving. They
are by definition cheerleaders.
I don’t fault them for it, but I
don’t care to hear it. ” ~ Ted Aronson

More on the book at Amazon; see also Must-Read Investing Books.