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Investment tip: annual shareholder meetings are undervalued

Sunday, 15-June-2014

I have been to a lot of annual shareholder meetings in my life, and am always surprised by how poorly attended they are.  Sure, there are some famous exceptions to the rule.  Nearly everyone has heard of the annual pilgrimage to Omaha tens of thousands make from all over the world each year to see Warren Buffett at Berkshire Hathaway’s (NYSE: BRK.A) meeting.  Wal-Mart (NYSE: WMT) and Starbucks (Nasdaq: SBUX) are also famous for holding celebrity-studded events.  Those tend to feel more like rock concerts than business affairs.  However, the vast majority of shareholder meetings are, to put it politely, a lot smaller than that.


To give you an idea, it is not rare for a company’s employees to far outnumber the handful of shareholders who show up at many of the ones I attend.  Sometimes these things even take place in a conference room they are so small.  That is a real shame because I personally think shareholder meetings are one of investing’s hidden secrets.  While most people assume they are all mundane non-events (or even worse, gripe fests), the truth is that attending can oftentimes give you a perspective on a company that is surprisingly valuable.  In a best-case scenario, they can even give you a huge leg up.


So if you are interested in deviating from the crowd, I highly recommend ignoring conventional wisdom and attending one or two.  Here are some of the hidden benefits you might find by doing so:


Attending meetings annually gives you a great macro view of a company


I am an old school, long-term investor.  That is probably one of the main reasons I like to attend meetings so much.  They provide the perfect setting to reflect on a company’s long-term accomplishments (or lack thereof).  These days it is easy to get caught up in the day-to-day noise of financial news and forget the big picture.  Rather than ‘missing the forest for the trees’, attending annual meetings will help you think about whether the company is really making progress on a macro level like it should be.  A year is a long time, and I have found that viewing a company from this perspective typically produces a clear and actionable picture about the business.  This goes far beyond just the stock price.


For example, last week I attended the annual meeting of Sarepta Therapeutics (Nasdaq: SRPT) for a second time.  The stock price was slightly lower than it was a year ago, but that is okay.  I have almost never seen a company grow so much.  The progress they made in between the two meetings was unmistakable, both in terms of tangible achievements and more generally.  Last year there was excitement in the room, but it was clear the management team was uncertain about many strategic issues.  This year, I saw a much more polished company with thoughtful plans about all aspects of the business.  Saying that Sarepta achieved a lot last year will sound obvious to anyone who follows the company from afar, but I am telling you, the difference is especially stark when seeing them over longitudinal periods like that.


Attending annual meetings gives you a good sense of a company’s culture


I try not to look at stocks as merely tickers bouncing around on a screen.  When you invest in a stock, you are buying a piece of equity in a living, breathing company.  With that in mind, it pays to focus on all kinds of factors that influence a company’s long-term trajectory, including intangibles like a company’s culture.


Most people know from their own personal work experience what an important thing culture is to success.  A great product can be squandered by poor corporate culture any day.  Since that is true fundamentally, you need to pay attention to it as an investor as well.  However, culture is difficult to gauge from the outside.  That is where the annual meeting comes into play.  Seeing how a spectrum of the company’s officers and directors present themselves, if even for such a short period of time, is surprisingly enlightening.  I particularly take note of a few things.


First, how does the company’s management team present themselves?  Watch everything from how articulate they are to what is the quality of their planning.  Some companies tend to take things as they come, whereas others have clear strategic goals for the long-term future.  You obviously only want to invest in the latter.  Even pay attention to things like how confidently they present the materials and what their body language is.  I want to invest in confident, optimistic people, but also ones who are businesslike and keep hype to a minimum.  Also, look for management teams who provide a realistic assessment (both good and bad) of the previous year’s accomplishments.  Those who sugarcoat a bad year cannot be trusted.


Second, does the company respect and value its investors?  For example, I have been to meetings with uncomfortably tight security, and where explicit instructions were given that all electronic devices should to be turned off.  When a company feels the need to control a meeting that tightly, and is disrespectful to its own shareholders, it is a sign that they do not deserve your hard-earned money.  I realize there is a possibility of a fringe element showing up at meetings, and that companies have to be careful, but it does not change the fact that everyone deserves to be treated with respect and dignity.

Finally, I even pay attention to small things like how much money companies spend on their meetings.  It amazes me when I see tiny, broke companies spend huge amounts producing these things.  Expensive AV equipment or ridiculously extravagant food offerings are usually the biggest violations.  Focusing on those things might sound like overkill, but I view them as a bad sign since they likely reflect how the company approaches business in general.  As far as I am concerned, grandiosity is not a good thing when you are spending my money.  All a company needs for a successful meeting is a room, a podium, and maybe coffee.  Anything significantly more extravagant should be viewed with skepticism.


Annual meetings give you a better feel for the caliber of the people at a company


In addition to learning about culture, smart investors will also want to understand the caliber of employees the company is attracting.  This is another key variable that so many in the stock market are oblivious about.  Pay attention to it because this separates truly great companies from mediocre ones. 


Attending annual meetings will give you unequaled exposure to form an opinion on this.  While you can always meet the CEO and a few other high-level executives at investment banking conferences, nothing like that compares to the depth of employees you are likely to encounter at an annual meeting.  In fact, many CEOs view annual meetings as a chance to give what I would describe as a ‘state of the company’ address, so it is not uncommon for employees of all ranks to attend.


Depending on the size and format of the meeting, there is a good chance you will have the opportunity to casually chat with people from the company at some point.  This will give you a sense of how experienced they are, what other companies they have previously worked at, and how passionate they are about the job.  Believe me, these things paint a valuable picture.  You might even learn a few interesting snippets like how the employees really feel about the CEO.  I have heard of investors trying to do this type of research by reading resumes on LinkedIn, but nothing compares to meeting people in person and getting a feel for it directly.


Attending annual meetings can give you unprecedented access to management and the board


It is not often that shareholders have an opportunity to directly interact with a company’s board of directors.  That is unfortunate because the explicit job of the board is to represent your interests (though not all do).  The difference between a company with a good board and an incompetent one is consequential.  You will have a huge leg up on the market if you can make an educated call on which it is in your particular case.  Since the annual meeting is technically the only place where these two parties are formally given the opportunity to openly meet and exchange ideas, make the most out of it.


The level of interaction you will be afforded obviously depends a lot on the size of the meeting.  At a minimum, you will have a chance to ask a question or offer a comment during the Q&A section.  You have the rest of the year to hear from the CEO, so use the meeting to focus on the board when possible.  I typically try to address my question or comment directly to them in order to get a good feel for how capable and engaged they are in their oversight of the company.  In addition, you might also have a chance to informally chat with directors before or after the meeting as described above.


As it turns out, this makes the small meetings that nobody attends the best ones.  In fact, I have been to many meetings where it was primarily just the company’s board and myself in a conference room.  Name any other situation where an investor has one-on-one access to a company like that.  While most people think a lack of attendance is why meetings are not useful, they are missing out on one of investing’s hidden secrets.  I actually hope meetings turn out that way.  Those situations are not only a great way to learn about what is going on at the company, but if you do your homework and carry on a smart conversation, it will establish mutual respect and lead to a more constructive dialogue going forward.  Something like that will give you an advantage as an investor.


Conclusion and final thought


The bottom line is while most people (and some companies) scoff at the idea of annual meetings, you might be surprised by what can be learned from them.  At a minimum, they will give you a much better appreciation for how a stock is not just a symbol on your computer screen, but a dynamic entity with many factors affecting success, including the human beings who are there to make it happen.  Especially if you are a long-term investor, I highly recommend attending a meeting or two to see for yourself what they are all about.


One last thing….I recently wrote an article about why I think breakout room sessions at investment banking conferences should be webcast so that all investors can hear them out of fairness.  In the same spirit of transparency and leveling the playing field, I feel the same about annual meetings.  Probably less than half are currently webcast, so there is a lot of room for improvement on that issue.


Annual meetings are technically fairer than the banking conferences because all shareholders are invited (as opposed to only clients of the bank), but the reality is that a vast majority cannot make it.  Therefore, all meetings should be webcast in a perfect world.  This does not change what I think can be uniquely gained by attending in person, but everyone deserves an equal chance to at least listen in.  Thanks a lot to a very smart investor on twitter, @themicrokid, for bringing this up to me.  He is right about it.

Who Am I?
Brad Loncar

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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