You may have played the game “telephone” as a kid. Everyone would stand side-by-side in a circle and one person would whisper a message in the ear of the person next to them. The message would find its way around the circle until the last person announced it to the group. Most of the time, the message was completely different for the last person than it was for the first.
In the real world, messages are lost in translation all the time. From a curt text message with an indecipherable tone to an email that unintentionally conveys humor, what we say can sometimes be easily misconstrued. This phenomenon can also be applied to company conference calls when earnings are discussed with investors. But there is a way to cut through the talking points to get to the real substance.
From transcript to analysis
More and more in the world of investing, technology and big data are revolutionizing the way information is processed and decisions are made. We’ve talked about how we leverage big data to cut through the noise, analyzing key economic data alongside consumer behavior online to help guide our investing philosophy. But, alongside consumers, there’s another group that can offer insights into important trends: CEOs and CFOs.
By using automated techniques to read the transcripts of company conference calls, we can identify the topics that company managers consider to be important to their business.
And rather than just selecting a handful of calls to dial into, these tools enable us to do the equivalent of listening to every conference call, understanding what management said and putting that in context both historically for the firm and comparatively across the rest of the market.
Let’s walk you through an example using data from last quarter’s conference calls.
While Greece and the European Central Bank’s quantitative easing program are two headline-dominating topics, we found that the most recent conference calls haven’t touched on these subjects. In fact, our research found that
U.S. executives spent less time talking about Greece and Europe over the past several months than at almost any time since 2012.
Frequency of the word “Greece” in conference calls
(Survey of 2,000 Firms)
Frequency of the word “Europe” in conference calls
(Survey of 2,000 Firms)
This indicates to us that perhaps while Greece and Europe are the focal point of the financial markets, CEOs and CFOs are focused on other issues and don’t see it affecting their business results.
So what are they talking about?
In the most recent round of conference calls, the word “WolfCamp” was used quite frequently. WolfCamp is a huge shale energy field. As you can imagine, shale energy has come under threat as oil prices have dropped, but executives are talking about it again, suggesting resilience in the fracking boom. Here’s what that jump looked like:
Frequency of the word “Wolfcamp” in conference calls
(Survey of 2,000 Firms)
Another peculiar term saw a similar jump: Biosimilar.
Frequency of the word “Biosimilar” in conference calls
(Survey of 2,000 Firms)
A biosimilar is a close copy of a complex drug. In other words, drug companies can produce “biosimilars” that have similar effects to other drugs without needing to replicate the original drug’s closely-guarded manufacturing process. Why is this significant? Well, if you consider the many blockbuster drugs that are set to lose their patent protections over the next few years, revenue generation from biosimilars could be quite substantial.
As an investor, though, the obvious question regarding these topics is: What are the implications for the company’s stock returns?
Well, the recent performance of companies who mention the topic can provide a clue. Let’s take a look at how, as a group, firms that talk a lot about certain biotech/pharma have done:
How some medical and biotech terms are associated with positive returns
(Survey of Q1 2015 Data for 2,000 Firms)
| Topic | Weighted Average Return of Firms That Discuss Topic on Recent Conference Call |
| malignancy | 7.10% |
| arthritis | 4.90% |
| antibody | 4.50% |
| protease | 4.50% |
| hormone | 4.00% |
| neurology | 3.40% |
Returns as of July 15, 2015. Source is BlackRock Scientific Active Equities Group Research as of July 15, 2015. For illustrative purposes only. Past performance does not guarantee future results.
We can also see how other medical and biotech terms are associated with weaker returns:
How some medical and biotech terms are associated with weaker returns (Survey of Q1 2015 Data for 2,000 Firms)
| Topic | Weighted Average Return of Firms That Discuss Topic on Recent Conference Call |
| pathogen | -4.30% |
| cardiology | -4.40% |
| lesion | -4.50% |
| enzyme | -4.80% |
| dermatology | -6.40% |
| carcinoma | -8.30% |
| genome | -8.40% |
Returns as of July 15, 2015. Source is BlackRock Scientific Active Equities Group Research as of July 15, 2015. For illustrative purposes only. Past performance does not guarantee future results.
How we apply our findings
After scouring more than 2,000 conference calls every quarter, we can determine which topics are associated with positive or negative returns, implying sentiment toward them as a positive or a negative. We can then see which firms are exposed to these positive or negative trends based on whether or not management mentioned them on the call and update these insights daily. The advantage is being able to find all firms that have exposure to a topic, even if that exposure has been overlooked by the market. There are always a few firms which come first to mind for certain topics, but investors have to dig a bit deeper if they want to uncover opportunity.
The prevalence of topics or themes can be extremely important for stock returns. Consider the internet boom and bust, the rise of mobile computing, the financial crisis and oil prices; all have, at one time or another, had massive impact on stock prices. Being able to adapt to new topics as they emerge and identify the firms that could benefit or lose out is an essential part of investing.
This is a guest post from Paul Ebner and The Scientific Active Equities Team at BlackRock.