Nonfinancial signals of bubbles and inflated share prices

They say that you learn more when things don’t go your way. It follows that you might have to explain less when they do. Barron’s recently did a study of the length of the PowerPoint presentations released by companies in the Russel 1000 index that supports this claim:

“Our conclusion: The longer the slide deck, the lousier the performance. The worst performers’ earnings presentations are, on average, 12 pages longer than those of the best. The top six stocks by sector effectively marry performance to brevity: Steel Dynamics , Burlington Stores , Netflix , Nvidia , Abiomed , and XPO Logistics. The group returned 48% a year for five years.”

A new study finds that health of local newspapers can have a significant impact on a local governments ability to access capital. As you read the excerpt that follows keep in mind that rising yields make issuing debt more expensive for the issuer (local government) and that the price of the underlying security has an inverse relationship to yield (i.e. bonds lose value as yields rise).

“They found that three years after a newspaper shuts, market yields climb by 6.4 basis points, and for newly issued bonds, yields are 5.5 basis points higher. (A basis point is 1/100th of a percentage point.) The effect is even more pronounced in areas with already bad governance: The authors found that newspaper closures increase borrowing costs by 12.3 basis points in states with low-quality governance, compared with only 5.5 basis points in states with high-quality governance. And for revenue bonds, which are backed by project-specific cash flows, secondary and offering yields climbed 9.9 and 10.6 basis points, respectively. (Bond prices and yields move in opposite directions.)”

The article provides some interesting rationale. Follow the link below for more information.

Some metrics make all the sense in the world when you hear them, the challenge is knowing to look for them. When I first read the Barron’s article cited below the only thing that really jumped out at me is that I had not really considered fluctuations in name badges (not exactly where my mind wanders when idle…).

The article quotes Imprint Plus CEO Marla Kott’s observation that on a rolling 12-month basis “[Imprint Plus] badge sales are two months ahead of the Dow’s performance.” In other words, if the company has a bad month, it will be reflected in the Dow’s performance approximately two months later.

The article elaborates:

“This apparent correlation isn’t surprising, perhaps. Kott notes that Imprint’s business is tied to employment. If companies are anticipating growth, then they are hiring and giving their new employees new badges. And the Dow commonly moves on official jobs numbers. ‘Increased badge sales suggests hiring is going up,’ she adds.”

With the amount of media coverage devoted to any large company’s intention to build a new headquarters, its surprising to me that there isn’t more commentary on share price performance before and after construction. As former hedge-fund manager Andy Kessler points out in the WSJ, a new lavish office can indicate it’s time to sell:

“When a company announces it is moving its executives into a lavish palace, it’s often time to get out.

Consider the Frank Gehry-designed IAC Building in Manhattan, completed in 2007. It’s the deconstructivist-style headquarters for InterActiveCorp , owners of CollegeHumor and Tinder. I find it ugly. And IAC stock deconstructed itself, going from around $40 in 2007 to under $15 two years later, though it has since rebounded.”

I have not managed to find any recent comprehensive data on this subject, but I find it interesting nonetheless. Particularly so as it applies to private companies where financial data is not readily available. Having spent most of my career in private markets, the latter may be why I find nonfinancial indicators so fascinating.

Please follow the link to the article for a list of additional examples, as well as a couple counterexamples.

An article in the WSJ reports that Evercore ISI has been tracking Christmas tree sales since 2003 as a means of gauging consumer confidence in the economy:

Mr. Sloterbeck [head of company surveys at Evercore ISI] polls regional Christmas tree associations, farmers and retailers around the U.S. to get a sense of how the holiday shopping season is doing. He tracks thousands of Christmas tree sales. With people willing and able to spend nicely on Christmas trees, as well as wreaths and garlands, the assumption is they might also spend plentifully on gifts. A healthy jobs market, rising wages and low gas prices offer ripe conditions for a strong holiday season.

Per the article, towards the conclusion of 2016, Sloterbeck’s data showed a 10% increase over the prior year, which at the time was the largest increase since the firm began collecting this data.

Only in Silicon Valley… the WSJ reports that the decline in Twitter’s financial performance could have been anticipated. If only investors had thought to look at the number of ping pong tables the company was purchasing leading up to the Q1 2016 earnings release:

Twitter’s gloomy quarterly report last week unsettled investors. They might have anticipated trouble more than a year ago had they noticed one key indicator.

Until late 2014, Twitter was regularly ordering ping-pong tables from Billiard Wholesale, a store in San Jose, Calif. Then, suddenly, it wasn’t.

The store’s owner, Simon Ng, figured it either ran out of space “or they’re having company problems.”