CHAPTER 3 The Buy-Side: Institutional and Retail Investors

The nice thing about institutional and retail investors is that their objective

is the same as the company’s. They want the stock price to appreciate. An

investor who understands the long-term investment thesis is a valuable partner

because this investor takes some supply out of the supply-and-demand

equation, and sets the table for a demand imbalance should the company’s

earnings increase.

It is not only possible, but very productive, to match specific investors

with specific companies for long-term partnerships. In fact, investors who

take large positions in a company’s stock can have a big influence on share

price. If they believe in the company and management, then they will most

likely buy and hold, which can reduce volatility and keep the stock price on

an even, upward keel. IR should identify, establish, and maintain strong relationships

with these investors and keep track of how these investors can

change with valuation changes.

THE BUZZ ON THE BUY-SIDE

The majority of the money invested in stocks comes from fund and portfolio

managers overseeing formally organized pools of money. The rest comes

from individual investors. For the time they hold the stock, these are the

company’s owners, and their perceptions and those of potential investors are

what matter.

Institutional investors, led by portfolio managers, are responsible for

large amounts of money that need to find a way into the market. This class

of investor gets funds from foundations, endowments, pensions, estates,

asset accounts for high-net-worth individuals and families, and companies

with large cash balances, like commercial banks and insurance carriers. Retail

investors have become a greater force in the market because of the advent

of Internet-based trading and the expansion of retail brokerage houses.

These individual investors (not to be confused with day traders, who are not

true investors) can be targeted through the retail brokers and brokerage

houses through which they trade.

All of these investors have different objectives. Some want security,

while others take more risk for more reward. In general, investors are

thrown into three categories.

Value investors look at metrics like P/E, or enterprise value to EBITDA

(earnings before interest, taxes, depreciation, and amortization), and purchase

stocks that have unrecognized potential and are trading at a discount

to others in their industry.

Growth investors also look at P/E and EBITDA, but also look for consistent,

above-average increases in market share, sales, cash flow, and retained

earnings that get pumped back into operations.

Income investors are looking for current cash—that is, dividends—

and all the better if the stock price appreciates and they garner a solid total

return.

Some investors can’t be categorized so succinctly. Factors that play into

their objectives may include a focus on technology, an emphasis on environmental

policies, growth at a reasonable price, or micro-market-cap investing.

Aside from the aforementioned objectives that characterize investors, IR

professionals should recognize the other players on Wall Street.

The first are the short-sellers, those who bet against a company. They

sell borrowed shares and hope to buy them back at lower prices, thereby

profiting.

The second are the momentum or tape players who look for quick paper

gains. These players are essentially traders who buy in and out of stocks,

taking advantage of short-term movements. They tend to create volatility,

are not long-term-oriented, and rarely spend the time necessary to understand

a company.

IR that helps management deal effectively with short-term fluctuations

in the stock caused by these players is invaluable. The key is always being

conservative with financial communications and focusing on long-term fundamentals,

which gives those shorting the stock or trading the market less

relevance.

Companies should also understand and accept that there is an army of

short-term commission players on Wall Street and that management can do

little to combat them. Ultimately, stock prices find the level that correlates to

financial performance and perception at any given time, so management must accept that fact on a day-to-day basis and deal professionally with

these groups to preserve credibility and protect value. Admittedly, that’s not

always easy when a big investor or board member implores the CEO to take

action against a short-seller. The situation can become emotional. Having an

IR effort that can identify short sellers, understand the situation, and take

the emotion out of the issue is paramount.

MANAGEMENT AND THE INVESTORS

Every investor considers factors such as profitability, operating efficiencies,

growth potential, competitive positioning, and management. The last is not

only not least, sometimes it can be everything.

It’s an old adage: people invest in people. There’s a premium investors

pay for Bill Gates’s vision or Warren Buffett’s experience. Investors like to

know and trust the person managing the company and hear them elucidate

their views and strategy. However, they don’t want to hear them promoting

themselves or the companies they run. It’s a fine line, and while confidence

in management leads to investor confidence, IR must help management balance

this high wire.

IR RELATIONSHIPS WITH THE BUY-SIDE

IR’s pursuit of the right investor benefits not only the company but the investor

as well. Most portfolio managers spend most of their brain power trying

to do the right thing with the millions of dollars for which they’re responsible.

If IR relays a company’s value story in the language a portfolio

manager is used to hearing, the company has a much better chance of surfacing

through the hundreds of investment options piled on the fund manager’s

desk. Also, if the portfolio manager respects the IR representative’s capability

and knowledge of the capital markets, the IR team has effectively

saved fifteen to thirty minutes of the CFO’s or CEO’s time by communicating

the basics of the story. Replicated over dozens of portfolio managers,

that’s significant time savings that management can put into the operations

of the company.

Once the portfolio manager has decided to become a long-term holder,

IR that understands how to communicate with that money manager and

The Street in general will position the company for sustained equity value. If

the buy-side believes that management knows not only how to execute, but

also how to communicate decisions so that the buy-side’s investment is pro-

The Buy-Side: Institutional and Retail Investors 23

tected, the art and science of negotiating the market combine to maximize

valuation.

That is why the buy-side, more than anyone perhaps, appreciates capital

markets–based IR counsel. Strategic advisors who have sat in their seat

understand investment goals and the hot-button issues that can cause shortterm

volatility. The IR function, without experience and information, can’t

possibly have this perspective.

The nice thing about institutional and retail investors is that their objective

is the same as the company’s. They want the stock price to appreciate. An

investor who understands the long-term investment thesis is a valuable partner

because this investor takes some supply out of the supply-and-demand

equation, and sets the table for a demand imbalance should the company’s

earnings increase.

It is not only possible, but very productive, to match specific investors

with specific companies for long-term partnerships. In fact, investors who

take large positions in a company’s stock can have a big influence on share

price. If they believe in the company and management, then they will most

likely buy and hold, which can reduce volatility and keep the stock price on

an even, upward keel. IR should identify, establish, and maintain strong relationships

with these investors and keep track of how these investors can

change with valuation changes.

THE BUZZ ON THE BUY-SIDE

The majority of the money invested in stocks comes from fund and portfolio

managers overseeing formally organized pools of money. The rest comes

from individual investors. For the time they hold the stock, these are the

company’s owners, and their perceptions and those of potential investors are

what matter.

Institutional investors, led by portfolio managers, are responsible for

large amounts of money that need to find a way into the market. This class

of investor gets funds from foundations, endowments, pensions, estates,

asset accounts for high-net-worth individuals and families, and companies

with large cash balances, like commercial banks and insurance carriers. Retail

investors have become a greater force in the market because of the advent

of Internet-based trading and the expansion of retail brokerage houses.

These individual investors (not to be confused with day traders, who are not

true investors) can be targeted through the retail brokers and brokerage

houses through which they trade.

All of these investors have different objectives. Some want security,

while others take more risk for more reward. In general, investors are

thrown into three categories.

Value investors look at metrics like P/E, or enterprise value to EBITDA

(earnings before interest, taxes, depreciation, and amortization), and purchase

stocks that have unrecognized potential and are trading at a discount

to others in their industry.

Growth investors also look at P/E and EBITDA, but also look for consistent,

above-average increases in market share, sales, cash flow, and retained

earnings that get pumped back into operations.

Income investors are looking for current cash—that is, dividends—

and all the better if the stock price appreciates and they garner a solid total

return.

Some investors can’t be categorized so succinctly. Factors that play into

their objectives may include a focus on technology, an emphasis on environmental

policies, growth at a reasonable price, or micro-market-cap investing.

Aside from the aforementioned objectives that characterize investors, IR

professionals should recognize the other players on Wall Street.

The first are the short-sellers, those who bet against a company. They

sell borrowed shares and hope to buy them back at lower prices, thereby

profiting.

The second are the momentum or tape players who look for quick paper

gains. These players are essentially traders who buy in and out of stocks,

taking advantage of short-term movements. They tend to create volatility,

are not long-term-oriented, and rarely spend the time necessary to understand

a company.

IR that helps management deal effectively with short-term fluctuations

in the stock caused by these players is invaluable. The key is always being

conservative with financial communications and focusing on long-term fundamentals,

which gives those shorting the stock or trading the market less

relevance.

Companies should also understand and accept that there is an army of

short-term commission players on Wall Street and that management can do

little to combat them. Ultimately, stock prices find the level that correlates to

financial performance and perception at any given time, so management must accept that fact on a day-to-day basis and deal professionally with

these groups to preserve credibility and protect value. Admittedly, that’s not

always easy when a big investor or board member implores the CEO to take

action against a short-seller. The situation can become emotional. Having an

IR effort that can identify short sellers, understand the situation, and take

the emotion out of the issue is paramount.

MANAGEMENT AND THE INVESTORS

Every investor considers factors such as profitability, operating efficiencies,

growth potential, competitive positioning, and management. The last is not

only not least, sometimes it can be everything.

It’s an old adage: people invest in people. There’s a premium investors

pay for Bill Gates’s vision or Warren Buffett’s experience. Investors like to

know and trust the person managing the company and hear them elucidate

their views and strategy. However, they don’t want to hear them promoting

themselves or the companies they run. It’s a fine line, and while confidence

in management leads to investor confidence, IR must help management balance

this high wire.

IR RELATIONSHIPS WITH THE BUY-SIDE

IR’s pursuit of the right investor benefits not only the company but the investor

as well. Most portfolio managers spend most of their brain power trying

to do the right thing with the millions of dollars for which they’re responsible.

If IR relays a company’s value story in the language a portfolio

manager is used to hearing, the company has a much better chance of surfacing

through the hundreds of investment options piled on the fund manager’s

desk. Also, if the portfolio manager respects the IR representative’s capability

and knowledge of the capital markets, the IR team has effectively

saved fifteen to thirty minutes of the CFO’s or CEO’s time by communicating

the basics of the story. Replicated over dozens of portfolio managers,

that’s significant time savings that management can put into the operations

of the company.

Once the portfolio manager has decided to become a long-term holder,

IR that understands how to communicate with that money manager and

The Street in general will position the company for sustained equity value. If

the buy-side believes that management knows not only how to execute, but

also how to communicate decisions so that the buy-side’s investment is pro-

The Buy-Side: Institutional and Retail Investors 23

tected, the art and science of negotiating the market combine to maximize

valuation.

That is why the buy-side, more than anyone perhaps, appreciates capital

markets–based IR counsel. Strategic advisors who have sat in their seat

understand investment goals and the hot-button issues that can cause shortterm

volatility. The IR function, without experience and information, can’t

possibly have this perspective.