To those unsophisticated in the business arts, the behavior of Wall Street and its analysts may seem arbitrary, based on emotion, greed, self-aggrandizement and a narrow understanding of the true interests of organizations and the customers they serve. It takes deep study to perceive otherwise, in fact. Just this morning, for instance, a company we all know was downgraded. I’m not going to tell you which one, or who downgraded it from Outperform to Neutral, because 1) I don’t want to hurt the company any further, because it is a great one and 2) I don’t want the analyst who did it to get any publicity, even in this limited venue.
The reason why the company in question was downgraded? It’s doing too well. It’s had too good a run. And because it’s had such a good year in a down economy, it makes Analyst-Style Sense (you work out the acronym) to bet that they’re not going to do as well in the future. Hence the downgrade.
Now, you may think, just looking at the bald facts of the matter, that this line of thought is capricious, punitive and in the long-term best interest of nobody in particular. But you would be wrong. It is a consistent, totally rational outcome of the general expectations that Wall Street and its various dogsbodies have of your company.
I thought I would begin this week with a very small, very pungent overview of this issue, since those who understand it are better equipped to manage their enterprises and invest in those that toe the line.
Here is what Wall Street wants from your company:
- Grow. If you made $6 billion in profit last year and you make $6 billion in profit this year, you stink. You need to grow revenue, earnings per share and profits every single quarter. If you want to invest in your businesses, or have changed your business mix year-to-year, that’s okay for you. As long as the raw numbers increase.
- Grow double digits. And single-digit growth isn’t enough. You must produce bigtime expansion in all key measures or you will be punished.
- Grow double digits without acquisitions. And oh yes. Wall Street doesn’t like you to spend your money on growth via acquisition. It wants you to grow, of course, but also not to buy anything to do so. If you do, they will hammer you.
- Grow double digits while selling stuff. Also, Wall Street really glows with pleasure if you’re constantly monetizing your assets. This means continually selling off stuff, preferably stuff that’s performing very well. You can say that you captured its value at the top of its curve, and that passes for intelligence in this domain.
- Fire people. Wall Street also loves you to can people. The more people you fire, the better they like it. Wall Street feels that the exercise of management control and firing people are one in the same thing, and will reward you for it.
- Fire more people than you did last year. If you have growth in this area as well as all others, they’ll be happy about that too.
- Grow double digits without acquisitions while firing a lot of people and selling stuff every year. Obviously, you have to do all of this simultaneously and work out the internal inconsistencies. But that’s why you went to business school, right? What do you mean, you didn’t?
- Do stock buybacks. In addition, Wall Street would also like you to take all the cash generated by your businesses and give it back to investors as often as possible. It is very annoyed, as previously noted, if you use it to purchase growth, and even more annoyed if you utilize your cash to growth internally, offer employees better benefits, or bank it to improve your balance sheet.
- When you run out of all other ideas, put yourself in play. Any company that can’t be bought and broken up into its constituent parts suffers a huge discount in its share price. The purchase and subsequent destruction of corporate organizations makes Wall Street hot and zingy.
- Treat your company like an investment, not an operation. The rise of MBA thinking has created the conviction that organizations exist not to provide a service to customers, or a place of employment for workers, but as a machine whose purpose is to disgorge money to the people who own its stock. Once you understand this, the rest falls into place.
NOTES: People to make happy include sell-side analysts, buy-side analysts, psychoanalysts, little old ladies with one share of stock, hedge funds betting on your demise, the press that covers Wall Street. People to disregard: employees, long-time management of the company, customers to the extent that their demands impinge on all the factors above.
That’s it. Don’t thank me. Have a nice day.