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Investor Relations Implications Of Monday's Drop: Ownership To Remain Unchanged
Business Wire - October 28, 1997 15:16
%GEORGESON %MARKET-DROP %NEW-YORK %BANKING V%BW P%BW
NEW YORK--(BUSINESS WIRE)--Oct. 28, 1997--Georgeson's Senior Managing Director or Research, Richard Wines, offers the following analysis of the investor relations implications of yesterday's correction:
What's going on? Probably not too much. We expect the ownership composition of most stocks to remain relatively unchanged despite yesterday's record trading activity:
- Yesterday's volume was the equivalent of only about 0.3% of the
shares outstanding in the whole market. Our study of the impact of
the 1987 crash on the ownership of our clients showed that about 60%
of the volume on "Black Monday" and the following two weeks was day
trading, index arbitrage and other types of short-term activity that
did not result in any permanent changes of ownership. Probably
yesterday's percentage of short-term trading was even higher -- much
of the volume was the same shares trading repeatedly. - Most institutional positions will remain unchanged. Our 1987 study showed that overall institutional ownership remained steady during the weeks following that event. Total movement of shares between institutional positions averaged only about 2% of the outstanding shares.
- Individual ownership will also remain steady -- as our study
showed it did following the 1987 market crash. Individuals were not
net sellers. - Mutual funds may lighten their positions slightly. Fund managers (especially Fidelity) were major sellers in 1987. At the very least, the net of purchases and redemptions is likely to turn negative, removing some of the upside support that had come from mutual funds. However, this effect will be moderated because approximately half of fund inflows currently are 401k and similar type investments that are basically on autopilot.
- Much of the institutional activity yesterday took the form of
options selling. This is the fastest way for mutual fund mangers and
other big investors to lock in profits. Moreover, they don't have to
sell any of their favorite picks. Of course this gets arbitraged
right back to the equity markets, but the impact is random. - As a result, most of yesterday's trading had little or nothing to do with the fundamentals or perceptions of particular stocks. Indeed, selling was probably focused not on the weakest stories but on larger cap stocks with the most liquidity.
What are the implications for Investor Relations Practitioners? - The next few days will not be good times for corporate announcements, especially positive ones. They will get lost in market news. (However, Georgeson has seen no fall-off this morning in analyst meeting attendance or teleconference dial-ups.)
- Corporations should review their relative valuation. Although
the impact of yesterday was widespread, not all stocks were affected
equally. Consequently, all relative valuation analyses should be
updated immediately. - Buybacks make more sense now than last week. In 1987, we did a special study that found that the many companies that announced buybacks in the weeks following the crash did not perform any better than those that did not. Nevertheless, with a "10% off" sign effectively on their securities, corporate treasurers should find this an attractive time to accelerate existing buyback programs and initiate new ones. Basically, the earnings leverage of a buyback will be 10% more this week than last and companies whose high p/e multiple previously made buybacks of marginal utility will now find the mathematics changed in their favor.
- Target lists need to be reviewed immediately -- as we always
recommend whenever valuation levels change. Lower multiples may make
value investors more viable targets than before for many companies.
Mutual funds are likely to be somewhat less attractive targets
because their net cash flow may halt or even reverse. - On the M&A front, the landscape has changed considerably. Outstanding and possible new stock tender offers have suddenly become less of a threat. On the other hand, cash goes further now, making cash tender offers more potent.
- Finally, IR practitioners must continue to communicate, to
reassure investors about the soundness of their fundamentals.
Investors will be looking for safety. Good communication is one of
the ways of providing that safety. But, don't be surprised if it is
hard to get analysts and managers to concentrate on your message in
the next few days. They have other things on their minds. - Explain any impact (or lack thereof) of the stock market correction on the fundamentals of a company -- i.e., potential changes in consumer activity, exposure to margin loans, changes in acquisition strategies, etc.
- Explain any potential impact of or exposure to Southeast Asian
markets. - Above all, don't panic. Remember that market events are not entirely rational.
Georgeson conducts analytical research into trends affecting shareholder composition, and counsels clients on enhancing shareholder value. Georgeson is the largest investor relations and corporate governance consulting firm in the world.
CONTACT: Georgeson & Company, Inc.
Richard Wines
212/440-9870
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