The Observer: Bad
publicity - not goodbye, but good buy: “Shell illustrates how a steady barrage
of negative publicity can bring a company to its knees”: “The company's
reputation is now in tatters”: "We list the latest batch of leaders and laggards
in the corporate publicity league in the accompanying table. These rankings are
based upon news reports in the last three months. The current '10 worst' list is
led by Shell."
Firms stuck in PR hell today may prove to be best value for the brave investor tomorrow, says stock market historian David Schwartz
Sunday July 4, 2004
Corporate newsflashes typically have a fleeting effect on a company's reputation and share price. But some reports are positioned so prominently and run for such an extended period that they can have a major impact upon a company's standing and the value of its stock.
Shell illustrates how a steady barrage of negative publicity can bring a company to its knees. Until recently, the company was considered a core holding in most institutional portfolios. Professional and private investors alike ranked it trustworthy and well managed.
The company's reputation is now in tatters. Revelations at the start of this year that Shell had systematically overstated its oil reserves led to a 10 per cent price drop in two weeks. The story went on to acquire additional momentum, triggered by government investigations, high-level executive resignations and a long overdue review of the company's management structure.
Investors found the revelations disturbing and fled in droves. Prices eventually bottomed out towards the end of March - almost three months after the story broke.
Links between extensive media coverage and share price can be positive as well as negative. Supermarket giant Tesco consistently attracts above-average levels of favourable publicity because of its superb record. It is growing faster than many of its competitors and its share price reflects this performance.
Contrarian investors often pay attention to trends like these. For those not familiar with the term, contrarians are individuals who do not follow mainstream market thinking. Indeed, they make a virtue of going their own way. Contrarians often take profits in one of their holdings when everyone else believes the company is a winner and is likely to continue to rise in the months ahead. They occasionally view companies beset by a litany of problems and poor headlines as possible buying opportunities.
Unfortunately, it is difficult to objectively quantify the amount of positive or negative press coverage received by an individual company. Investors would have to read every article, about every company, every day. They would also have to evaluate each story based upon a basket of variables, including position on page, length and circulation size of the newspaper. The task is obviously beyond the reach of most investors.
However media researcher Thomson Intermedia provides a useful service of this sort. It monitors every national newspaper on a daily basis. Every article that mentions a specific company is evaluated on a series of objective measurement criteria. The ratings are then combined to produce an overall score for every British company.
Regular readers might recall what happened in the aftermath of Thomson Intermedia's ratings in the first quarter of 2003. Nine of the 10 poorest-rated British companies underperformed the rest of the stock market during the first quarter of 2003. But the trend soon reversed direction. All 10 rose by more than the broad indices in the next 12 months.
A similar reversal occurred among the 10 highest-rated companies. Shares in eight of the 10 rose by less than the FTSE All Shares index in the year following the positive publicity.
These trends offer strong support to the contrarian philosophy of investing in out-of-fashion companies. Keep in mind, though, that there is nothing magical or precise about a one-year investment period - that period is selected out of editorial necessity. But it does make the point that patience is required for investments of this type.
Thomson Intermedia's '10 best' and '10 worst' lists for the first quarter of 2004 again appear to be following the norm. Shares in companies from the '10 best' list fell by 8.1 per cent in the last three months - much worse than the decline recorded for the FTSE All Shares index. In contrast, companies on the '10 worst' list fell just 2.3 per cent in the last three months. It is still early days, but so far these shares are performing as expected.
We list the latest batch of leaders and laggards in the corporate publicity league in the accompanying table. These rankings are based upon news reports in the last three months.
The current '10 worst' list is led by Shell. The length of time this story has had to run makes an important point. Investors cannot blindly jump into an investment merely because of a high ranking on the '10 worst' list. Judgment is required about whether that company has the potential to rise by a significant amount and whether the end of the bad news is in sight.
Numbers two and three on the list are Marks & Spencer and bus maker Mayflower. M&S is currently the subject of a takeover offer by Philip Green and prices have advanced sharply in recent weeks. It now emerges, however, that several large hedge funds are betting huge sums that Green's bid will not succeed. As a result, M&S shares will probably fall sharply and rapidly if the bid fails. Investing in M&S has become a short-term gamble, not a long-term investment. Value-oriented contrarians are probably better off standing aside,
Bus manufacturer Mayflower is also worth passing by. The company recently collapsed amid charges of falsification of financial records, odious pensions-linked decisions by the company's board and several shareholder lawsuits. As things now stand, there is little chance of investors profiting from this company, even if the negative headlines run their course.
But several other companies on the '10 worst' list are worth monitoring. Fourth-placed Sainsbury's has been poorly managed in recent years. Its chief executive, Sir Peter Davis, was frequently criticised. But he has now left the company and a new operating team is in place. If it can change the direction of the company and break away from Davis's failed strategy, Sainsbury's could be a marvellous profit opportunity for brave investors.
A bit more speculative is fifth-placed Jarvis, an engineering firm beset by headlines about shoddy work practices, railway accidents, cost overruns and missed profit targets. Last Friday brought news of further write-offs, in execess of £15m. Shares fell sharply. If the contrarian philosophy holds true, shares in Jarvis could be higher a year from now, despite all the poor news.
At the other end of the continuum are companies currently generating a great deal of positive publicity. Topping the current '10 best' list for the second quarter in a row is Tesco, wowing the City with ever-growing profits. The company continues to do no wrong as far as the business press is concerned.
If the Thomson Intermedia rankings are correct, shares in companies such as Tesco are currently priced for perfection and will be unable to maintain their position indefinitely. Tesco may be a fine company, but it is not a good buy for those seeking an above-average stock market performer in the year ahead.
PR winners and losers - first quarter 2004
2 William Hill
3 British Airways
7 Carphone Warehouse
10 Royal Bank of Scotland
2 Marks & Spencer
5 Jarvis Group
6 Royal & Sunalliance
7 Rentokil Initial
8 WH Smith