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Tuesday, July 18, 2006

The Counterpoint to Our Datapoint Point

By William Trent, CFA of Stock Market Beat

We recently discussed our feelings on what we view as an excessive emphasis on management meetings relative to sitting down and analyzing real data. We said:

Of course equipment orders are not going to continue to be up 60 percent year/year, as they have been for the last three months. With end demand for semiconductors rising at a single-digit rate there is only so much manufacturing equipment they need. We said the same thing yesterday and didn’t have to travel to San Francisco and spend hours hobnobbing with management to figure it out. The supply chain doesn’t have to be checked - it publishes its sales figures every month for Pete’s sake. Oh, we also said it last week. And a month ago. And the month before that. In other words, back when you could have saved yourself some money by not buying, or made some by selling short.

Jeff Matthews had an eloquent rebuttal: Reading Between the Lines

Some friends think Reg. FD has made it useless to meet with management, owing to the fact that management is expressly forbidden to disclose any material information in private that is not shared publicly. In fact, some investors—and they get written up in Barron’s once in a while—say it’s better to invest strictly by numbers, instead of visiting their companies and looking the CEO and CFO in the eye, because management always sugar-coats the truth anyway.

Still, I find it still useful, for all the reasons Barron’s mentions. After all, Enron’s numbers looked great for a while. (I know a long-only money manager at a firm which puts prime importance on management meetings; he never owned a share of Enron because he had met Jeff Skilling twice, and didn’t trust him as far as he could throw him.)

So anybody who thinks it doesn’t pay to sit in a room with a guy and take his measure is not only missing one of best parts of this business—meeting the interesting and brilliant along with the scummy and the devious—but also the chance to read what’s going on behind the mask.

This doesn’t always work. We found Joe Nacchio to be a very persuasive speaker even when lying. On the other hand, we never trusted Bernie Ebbers much. Ultimately our complaint is not so much about whether analysts are visiting management but how often they are doing so while apparently ignoring big picture data that should be staring them in the face.

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