When legendary St. Louis Cardinals pitcher Bob Gibson was in college, he reportedly told his catchers to make whatever hand-signals they wanted before the pitch. If you held down one finger, he’d throw a fastball. If you down two fingers, he’d throw a fastball. If you held down three fingers, he’d throw a fastball. If you made the batman symbol with your hands, you’re getting a fastball.
Reflecting on his baseball career later in life, Gibson said that he enjoyed a competitive advantage by being able to cultivate his fastball strength. Other pitchers, lacking the quality of Gibson’s fastball and fixating on the idea that they needed a curveball and slider as well, used up their focus on improving their weaker pitches.
During business conference calls, I pay close attention to whether the corporate team seems more focused on strengthening the fastball or improving the curveball because everyone says their curveball needs improvement.
The best businesses tend to be those that are choosing to devote their resources to new product launches, market share gains for existing product lines, or general innovation that results in the creation of a superior product or service rather than defensively trying to shore up weaknesses.
Identifying this can be difficult because: (i) company executives tend to brag about what has and will occur during their stewardship; and (ii) the Q&A format between analysts and company executives require that the discussion follow the lead of analyst questions.
You cannot determine the company’s by merely following the amount of time dedicated to an issue. A small regional bank could sustain a $15 million loss but be simultaneously opening a lucrative commercial-lending division in a rapidly expanding area of the country that will drive profits for years to come. If all the analyst questions are about the $15 million loss, you could miss that the issue had been paid off and the company is devoting its resources to the development of a new business line.
When BP engaged with investors after the Gulf of Mexico oil spill disaster, it made clear that its efforts were dedicated to costs—lowering the costs of litigation, lowering the costs of the judgments against it, and lowering the costs of its debt burden as it sought to lower interest expenses by turning unsecured debt into secured debt.
Meanwhile, an investor listening to Chevron’s engagements with investors made it clear that future efforts were devoted to developing new production technologies as part of its massive Gorgon liquidated natural gas project in Australia.
These conference calls made it clear that Chevron would be a better energy company five years from now than BP—Chevron was buying swords, BP was nursing bloodshed.
Recognizing that Chevron is a better business than BP is a distinctly different endeavor from determining which company marked a better investment. Throughout this time, BP traded at a much lower valuation than Chevron. Therefore, any conclusion about the superior investment required a separate analysis of whether the relative discount in BP’s stock price compensated sufficiently for its inferior business operations.
The best use of quarterly conference calls involves trying to figure out how much a company’s future resources will be devoted to marketing and innovation rather than sweeping out the detritus.