Types of company news announcements and how to judge their importance

Now, this is the fourth of these series of videos. We've looked at where to find the information that we've looked at, how to stop boring in, and not just the signs of measuring the numbers, but the art of qualitative the assessing them, the profit and loss account, the cash flow and the balance sheet and how they all linked together.

And this time we're going to look a little bit deeper into different types of company announcements and how to judge their importance for the share price, short term and long term. Some matter, some might not. But before we go any further, please just take time to study this extremely important disclaimer.

So let's move on. Types of companies announcements and how to judge their importance. We've already talked about the biggest ones which contain the numbers. First half results full year results.

But then you can have scheduled or unscheduled trading statements in between quarterly updates. Again just to make sure the company is being transparent and you as a shareholder, being kept informed and given the same information as everybody else, whether an institutional pension fund or a hedge fund or private equity, or maybe a private equity fund that's looking to to take over, to take over the thing so unscathed.

Little bits there can be the most dramatic or but equally, in a full year set a results. You can have predictions for the future called guidance, which diverges from, previous statements or analyst forecasts. And then the share price might move. Now, what triggers an unscheduled statement, as we've discussed before, is a degree of materiality. It's probably, as a rough rule of thumb, 10% difference up or down in terms of profits or cash flow or whatever metric the company uses relative to what it's guided to be full or analysts are expecting.

So material news you have a profit warning or a profit upgrade to clearly extremely material. But there are lots and lots of other types of information that come out, as you can see here, from an acquisition and a disposal, a takeover bid, a change in a chief executive, a change in chief financial officer, a share buyback or a change in share ownership by a major institution.

So lots and lots of different things for you to digest as you filter through the Regulatory News Service at 7 a.m. on your preferred provider. And again, some of those will move share prices. Maybe when they shouldn't, some of them will move share prices. Definitely when they should. And some of them may even change perception of a stock for the longer term, or indeed give you a feel that something is materially changing for the better, or materially changing for the worse.

But some of them, frankly, they are kind of noise.

And this is a dramatic example. This is holdings used to be quoted on the London Stock Exchange from 1998 to 19 to 2016, it was an acquired by SoftBank, and has since been spun off back onto the New York Stock Exchange. But, look at the share price chart here.

Up and down like a fiddler's elbow. But it was the same company pretty much through all of that time. Okay. There was one bit of a bust of an acquisition on the west coast of America in the early 2000s called artisan. That was a bit of a waste of $900 million, but ultimately, had the same operating model all the way through same customers, same target market.

Why did its share price move around so much? Yes, sometimes its annual growth rates, which would change and accelerate and slow down. But that was sentiment. That was the Benjamin Graham voting machine. The weighing machine, the cash flow that these companies operating models spat out ultimately won out because the share price recovered over time. Investors got overexcited in 2000, paid too high a price, then panicked and ultimately paid to lower price.

And this is the opportunity set that can be presented to you, the patient investor, as you do your numbers and wait in the long grass, spot the right model, spot the right time, spot the right price. You may then be able to really manage your downside and maximize your upside. Not saying it's easy, but that chart shows you those opportunities present themselves.

And if you're doing your fundamental research, then maybe you don't just look at that particular company itself. You look at its competitors, its suppliers, its distributors, its suppliers, Anything that you can try and garner a fuller picture of company, industry and even macro. Some geopolitical events will move share prices like wars, famines, goodness gracious, terrible things.

But sometimes, do they really make a difference to that company's business model? It's pumping, beating heart, not always cruel as it sounds.
And then macroeconomic figures. Generally speaking, I don't get too hot and bothered about great talking heads like me keep me on the radio. But actually, in terms of affecting a company's operating model, its long term prospects, not so much.

They're backward looking for starters, remember?

So then we get into different types of companies. Some may be more affected by certain types of news flow than others. I won't read all of these out, but growth company versus cyclical is a major one. Organic or acquisitive growth is huge in terms of quality of earnings, not just quantity, good or bad, corporate governance, weak or strong management.

And there are lots and lots of different variables. But we've talked about the profit and loss account. And remember always price times volume equals revenues. Knock off costs. And that's profit. Now know there lots of different flavors. But those are the three key levers looking at any business. And that's up to you to then work out which matters most.

Price volume and then obviously cost control. And some companies are really good at cost control. Some tend to nap on the job. And again, that's up to you to work out. And there are huge numbers of variables that can affect price and volume.

And there's a long list here. And you probably need to keep an eye on some of these, at least the it's currencies, whether interest rates.

But the big ones are things like product cycles and product mix and competition and market share. The company's competitive position, the pumping, beating heart we talked about that's measured by operating profit. And that will then eventually trickle down into net profit, which is the stuff that we own.

So if you want to boil all of that down really simply for questions, you should ask yourself before you when you research any company. 

Not my checklist. Charlie Munger, Warren Buffett's legendary long term business partner, superb investor. Over time, his track record suggests. And he always asked himself, according to Poor Chinese Almanac, for questions. Do I understand the business? Does the business have intrinsic value? By which he meant a strong competitive position? That meant customers were willing to pay for the products, and the company was able to generate a decent operating margin?

Does management have integrity?

Are they on your side as a shareholder, or are they robber barons looking to line their own trousers by cutting a few corners in the short term?
And does the company's stock come at a fair valuation? Doesn't have to be bargain bucket, but it has to come at a reasonable valuation. And again, that's a very judgmental thing, is probably an entire series of separate videos.

If the answer to all four questions is yes, it may then be worth you doing some of the research that we're talking about in these videos. If the answer to any of them is no, then you either have to move on, or at least make sure that you're taking a lower value it you're paying a lower valuation to compensate you for the extra risk that's involved in. 

What do I mean by risk? Well, the dictionary definition is obviously personal injury. The financial definition is permanent loss of capital. You buy something, it goes down and you sell it. That's risk.

And how do you measure that risk in terms of assessing the risk that a company can present you with, and you're trying to generate rewards that return you, that compensate you for that risk?

There's operational risk. The business model, the strategy, what it is, how well it's implemented, this financial risk, which relates to things like how it's funded debt, equity, pensions, leases and other liabilities. And then there's reputational risk, which is the management cut corners that they get the company into trouble with the regulator or with customers
or the low terrible things like that.
And that is often down to that intangible thing known as culture. It's hard for us as rich as private investors to get a feel for that.
But again, looking at the accounts, how management appeared, trying to watch webinars where management do present can give us a feel for how that company is run.

Now, on that issue of culture, Mr. Munger again, Buffett's long term business partner.

This is basic economics, right? Show me the incentive and I'll show you the outcome. Show you how people behave. So you've always got to look at how management are paid, what triggers are set, what profit metric they're based off, cash flow metric intangible things like your customer satisfaction show and employee satisfaction. Are they easy or difficult? Short or long term financial only?

What adjustments can they make? Is there a clawback? If they do something egregiously silly? All of these things are really important, and focusing on growth.

Anybody can grow a business, believe me, you just do lots and lots of acquisitions. But it doesn't always end well. As Royal Bank of Scotland Shelter has found out under under Sir Fred Goodwin.

So be wary of a focus on growth for growth sake. Growth is not a strategy. Growth is the product of strategy. Okay. So as we discussed whirlwind tour, some types of news flow is more important than others. Short term long term. It's the stuff that fundamentally affects the pumping, beating heart of the company a strategy, its balance sheet that really matters over the long run.

Noise is short term sentiment. That's fine, but long run, it's does it affect the ability to generate profit and generate cash and manage its bills? It really matters. And again this gives us A3D prospect accounting plus strategy plus valuation. That gives us a feel for why the share price may go over the long term. Valuation isn't a timing tool, but look at ALM.

It took an awful long time to recover from that technology bubble collapse. But boy, with the rewards there when they came through in the end, none of these can be viewed in isolation. The accounts are a snapshot. The historic. They need to be interpreted, viewed over a period of time. But again, the long term numbers will come out in the end.

A few spots, something with sound management, some strategy because they generate some cash flow and some shareholder returns. Two great quotes feature read here. Stop the video. Pause. Read them to epically successful investors. Work for them. If you're patient, can work for you. Providing you do all of this detective work a next time, we'll move on. We've already talked about the different types of news flow and how they can affect things.

Now we'll look at how events can really start to monitor and affect a company, and therefore in turn affect share price. And again, help us develop this 3D view of numbers, strategy and valuation. And as Benjamin Graham, Buffett's mentor, said, operations for profit should be based on not an optimism, but an arithmetic, a good story, a good start.

But as I'm showed, we had a great story when the share price was a thousand pence and a bad story in theory at 36 B but when should you been? You should have been doing the opposite to what the share price was telling you, because the company's business model didn't change over time, and it was still fundamentally very strong.

Look forward to seeing you next time.