Tell, Don’t Show: Why Messaging Matters More than Ever for Undervalued Stocks

With inflows picking up, portfolio managers have no choice but to deploy funds in the fourth quarter, even though most don’t have strong expectations for the market for the remainder of the year. Based on our discussions with investors and the sentiment of industry experts, this means portfolio managers are actively looking for one of two things: above-market growth opportunities, or overlooked and undervalued stocks.

Companies fortunate enough to fall into the first category have a relatively easy story to tell. Those in the latter, however, have their work cut out for them if they want to convince investors that they are truly a diamond in the rough. While frustrated CEOs can be tempted to show stock performance charts versus peers to illustrate relative value and convince investors that their stock is undervalued, companies know that it is the job of an investor to assess valuation. Historically, most portfolio managers haven’t reacted well to this type of heavy-handed approach.

However, they will respond well to thoughtful narratives that deliver clear and compelling messaging. Now’s the time to table the charts and focus on enhancing the story. Here are a few things to consider:

Giving investors the unique and compelling pieces of your story

A recent study by Goldman Sachs stated that micro factors, or stock-specific factors, drove 71% of S&P 500 returns over the past few months, the highest rate since 2016. The implication is that large-scale macroeconomic drivers fueled only about a quarter of all movements – down from 59% a year ago. This suggests that the most successful investors are looking at individual companies to find opportunities rather than taking a top-down approach to markets.

Morgan Stanley has made similar public statements. “We find that stock-specific risk (the percentage of stocks’ risk/volatility not explained by traditional factors such as the market or size) has been on the rise this year,” wrote Mike Wilson, Morgan Stanley’s chief US equity strategist, in an August 7 note. “Along these lines, we also find intra-stock correlation to have fallen significantly YTD.”

Companies can respond to these trends by emphasizing the bright spots and potential for value within their unique organizations. There are several ways to pivot the IR program to do this effectively.

Doubling down on current market themes

Spend some time educating new investors on trends and revenue opportunities within your industry. Focus on the total addressable market and how much of the TAM a company’s products and services could potentially address. Include figures to quantify the opportunity and show how the company has captured it to date. Most importantly, presents a clear case for how the company is well-positioned to capture the trend. This could include new investments in product innovations, sales and marketing, or distribution channels. A quick teach-in on new market opportunities by the head of product innovation or channel marketing would be a great way to help investors see the opportunity as management has envisioned it.

Building out a stronger discussion around intangible assets

Investors often undervalue intangible assets, especially if companies are not clearly speaking about how these assets can impact future growth. Companies with strong stories to tell in these areas can enhance the investment narrative by weaving in specific details. Some ideas include:

• Products: Emphasize low defect rates, high safety scores, a robust innovation pipeline, high customer satisfaction, and/or high customer support request volume.
• Employees and company culture: Speak to reduced turnover rates, high satisfaction levels, and/or high safety rates.
• Strength of management bench: Share ROIC statistics, acquisition track record, and achievement of company-specific milestones.
• Sustainability: Point to processes in place that ensure a low carbon footprint, low waste, and/or high recyclability. Include supporting details around customer/employee interest and demand for these strong sustainability practices.

Take a risk viewpoint

The myopic focus on quarter-to-quarter growth means that companies are not necessarily being rewarded for longer-term growth in the current market. Investors needing to deploy funds in the near term despite bearish outlooks for the rest of the year will need to look for opportunities beyond the next several months. Companies and IR professionals can help promote this shift back to considering longer-term trends by emphasizing what the company has delivered in the past and being willing to say what it believes it can deliver going forward, especially if the messaging highlights a lower-risk profile.

One way to change investors’ perceptions of a stock’s beta is to clearly identify and lead with anything that protects a company from major losses in market share or profit margin. Show the floors to the business – long-term contracts, the strength of customer relationships, and how embedded the company is in its key customers’ operations. Speak to competitive advantages including specific examples of recent wins.

Another way to help risk-averse investors believe in the future earnings potential is to highlight a diverse set of business drivers. Companies with products in beta that address new markets, or investments in new product lines or operating regions – even if these might not begin to contribute materially to revenues for several years, should think about addressing these opportunities aspirationally.  Addressing these drivers reminds investors that the company isn’t beholden to the fate of any one factor and can still hit future targets even if a particular driver does not materialize as expected. Clearly painting this picture can help boost investor confidence in long-term performance.

It may also be worth spending time directly addressing investors’ specific risk concerns, especially if management believes the investor is overstating a risk or if management has a different viewpoint on the issue that it can defend. In a volatile market, investors seem concerned (and sometimes, overconcerned) about the competition. This may be a good time to highlight pricing power with anecdotal examples of recent wins, or new inroads into potential customers that may have a long-term positive impact on market share. Companies taking this approach need to be aware that it is rarely easy to convince investors to change their minds. Success will hinge not only on the quality of the messaging but also on management’s credibility.

End with balance sheet

A robust balance sheet will elevate a company’s message and help keep financial flexibility and low near-term borrowing costs at the forefront of investors’ minds. Companies can speak to historical balance sheet strength, emphasizing how it has improved in the past several years, and pointing to leverage and how far out debt maturities are.

While many companies shy away from talking about the cost of capital when borrowing costs are high, most CFOs have a very rigorous cost of capital model. If the company is paying back debt at a faster pace than expected, explain the financial model that triggered that decision. If the company is hoarding cash, explain what’s on the CFO’s dashboard to support that decision.

Companies engaged in share repurchases will need to take special care with the cost of capital and valuation discussion. In volatile market conditions, investors are split on how they view such a strategy. Messaging needs to convey that low stock price was not the sole driver of this decision. A good analysis that shows the myriad of factors that played into this decision will help stop the naysayers.

Give investors opportunities to ask questions and uncover hidden value

Companies presenting new investor themes will need to actively engage current and potential investors alike to ensure clear understanding, particularly for misunderstood pieces of the business, trends supporting growth trajectory, or explaining any perceived weak spots while showcasing bright spots.  Keep in mind that consistency is key, and the medium is often the message. Think beyond crafting prepared remarks for traditional investor days, earning calls, and investor conferences, and consider new ways to keep telling the story, especially ways that allow investors to dive deeper into the details or unpack specific concerns.

For example, interactive teach-ins or webinars hosted by management can provide the ideal platform for incorporating expert analysis and additional product or market education to further shape investor perception. Cars.com recently hosted a Zoom call to share a beta concept for a new platform with its investors. The format provided a way for Cars.com to explain the addressable market and illustrate the platform’s features and potential to redefine the car buying experience, information that can be invaluable to investors looking for the right opportunities.

Tell the story investors want to hear

Investors are actively looking for golden opportunities. But companies must present more than charts and graphs to capture their attention. Organizations that focus on strategic narrative enhancements and do the work to help investors better understand and connect with their stories will stand out and be rewarded for the effort.

Need help communicating your “diamond in the rough” story in a way that resonates? Reach out to the strategic communications experts at Riveron for a comprehensive approach. From comping your efforts against industry peers to diagnosing the most critical aspects of your unique story, we help you craft and deliver the messaging that will drive your best valuation.

Sources:18 Stocks with High Upside in a Stock-Picker’s Paradise