How to spot an issue with stock reputation

A company’s reputation on the stock market is critical to investors and shareholders as it its plays a major role in valuation and share price movements. Indeed, the investment process requires trust and confidence in the shares. Despite this, stock reputation is not really taken into consideration because it is not formally followed, not measured and mainly qualitative. Many listed companies do not even have a precise idea of their reputation with investors. Equally, financial analysts and fund managers can have distorted views on a company.

Traditionally, companies have an idea of their reputation through analyst reports and the feedback they got from their meetings with fund managers. When they want to know more about it, they can order a perception study to be performed by specialized agencies. These studies are generally professional and highlight key areas of concern, but they remain qualitative and highlight only one part of the true reality. Fund managers and analysts also listen to what it said on the market and typically form their own opinion of a company. Yet their view is not always the full story or can be misrepresentative of the truth.

Yet, there exist two ways to spot a real problem of stock reputation with certainty.

Historical analysis of valuation and share price performance together

The underperformance of a stock can be due to a reputation problem but this is not always the case. Equally, an undervaluation is not always proof of a bad reputation on the stock market. On the other hand, an intrinsic, historical and constant undervaluation together with stock underperformance is a strong signal that a problem exists related to stock reputation. Under normal conditions, undervalued companies have relatively good share price performance. Investors, in particular “value” investors, are interested in those types of stocks and support them. If this is not the case, it is most likely because the company has reputational issues.

Analysis of share price behavior around publications

The other way to spot a bad stock reputation is to look at the share price behavior of a company before and after making announcements or publishing results. To have a full understanding and avoid any misinterpretation, it is necessary to analyze these movements over a long enough period. A review of more than ten publications (quarterly results, specific announcements…) is needed to form a clear opinion. That being said, a share price decline following results or an announcement is not necessarily due to a reputational problem within the investor community. It might simply be because profits or prospects are poor, or alternatively because expectations were too high. It will impact reputation but it is more due to a mismanagement of the announcement. To the contrary, a poor or stable share price performance before and after good results publication or a positive announcement is a clear signal that something is wrong. It means that investors are ignoring the positive, that they are solely focused on the risks and that they do not trust the company. Similarly, when a share price falls before results publication that means that investors are worried, lack confidence in the announcement to come and expect to be disappointed. If that happens once, it is probably not a problem but if it is systematically every quarter, it is most likely due to a real problem of stock reputation.

To conclude, with a serious and thorough analysis, it is relatively easy to spot a share’s reputational issue. In my opinion, it would be interesting for financial analysts, fund managers and management of listed companies to regularly perform this type of analysis to know whether one exists or not.