Many people think the value game comes down to the numbers. And ultimately, of course, you do have to make decisions about prices and earnings and things like that. But there's another side to this game, and that's knowing a company's story.
No doubt about it, being able to read a balance sheet is a great skill that can help immensely as you pursue your investment strategy. But no matter what anyone says, it's just as important to be able to interpret what management is saying on a conference call or in a press release. What it's
saying, that is.
Regardless of how its numbers look across the board, each company has a story it's trying to sell investors on. In many cases, whether management delivers on that story is what determines whether a stock realizes its true value. Listening to whether management has evidence for its bullishness (hey, face it, management's always going to be bullish) can be a key tell. Let's look at some examples of how this can play out.
Let's start with my short recommendation this winter on
. Here's what happened: During the company's third- and fourth-quarter conference calls, Ciena's chief exec, Gary Smith, focused on the positives. He said the company had just taken on several new customers and, that despite the "difficult" telecom-equipment environment, Ciena remained well-positioned for future growth.
But when pressed, Smith admitted that a continued slowdown in equipment sales throughout 2002 was likely. And although he continued to like the company's longer-term outlook, he couldn't predict a bottom for the business.
Because of this and some bad news on order flow, I didn't like the stock way back at $14.27. Since then the stock price has gone down more than 57%! But was I some sort of clairvoyant because I was able to read between the lines? Nah. The answer was there for everyone. It's just a matter of being able to sort through the rhetoric and being able to grasp the big picture.
The lesson: Beware of managers who imply that the worst is over -- but aren't able to back up their words.
Another great example of reading between the lines can be found in my recommendation of
. You see, despite Ted Waitt's optimistic report that a trimmed-down SG&A line (or selling, general and administrative expenses) and improved customer service have helped the PC maker's health, it looked to me as if the company was still in a period of heavy transition.
In fact, on several occasions, including the company's first-quarter 2002 conference call, Gateway acknowledged that margins remained a big concern. While Waitt may genuinely believe that the worst is over, he hasn't shown us anything that proves that's so.
The end result: Because of Waitt's comments and a relatively bleak pricing outlook for boxmakers, I thought it was best to steer clear of these guys way back in
March. While the jury is still out, I'm happy that I was able to convince other value hounds such as myself to seek greener pastures elsewhere.
Again, the lesson: Be on the lookout for signals that a company is in transition. And understand that it may take a long time for such stories to materialize.
My final example is
. When I first looked at the stock in my newsletter in October at $14.80, some subscribers thought I was foolish. After all, the retail environment was lousy. And the prospects for a strong Christmas selling season weren't much better.
But I saw something others didn't. I listened to several conference calls in which CEO Bruce Nelson was talking about the company's tremendous operating leverage. Every time Nelson opened his mouth, he was talking about new opportunities -- from improved store layouts to increased private label offerings -- like a kid in a candy store. From this I was able to infer that, in spite of the sluggish economy, earnings would indeed accelerate in 2002.
Turns out I was right. Since I first checked it out, Office Depot has turned in two stellar quarters. And management has reiterated its belief on more than one occasion that the company will be able to generate year-over-year EPS growth in excess of 30%, even if the economic rebound takes a little longer than expected. The stock has shown solid progress.
Bottom line: The old adage "sometimes it's not what you say, but how you say it that counts" couldn't be more true when it comes to the psychology of investing. So remember to listen to those conference calls, and try not only to comprehend what management is saying but also to determine if its comments are a harbinger of things to come. You'll be happy you did.
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In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Curtis welcomes your