The term “Story stock” used to mean a company with little more than a sheaf of press releases and a glitzy narrative about its future prospects. Now, ConvergEx's Nick Colas notes that pretty much any stock with a fighting chance of outperforming needs to have a “Story” to cut through the clutter of a noisy macro-driven market. Story-less equities where the valuation is cheap simply dawdle, while theoretically expensive story stocks sizzle loudly. So what makes a good story? The answer is not only “Blowin’ in the wind,” it is as old as the hills. CEOs matter intensely – they tell the story, and in the best cases they are the “Hero” at the center of it. Other types of narratives: “New Blood”, “Resurrection”, and “Conan the Barbarian.” And even with all these categories, Colas reminds us that we can’t forget that the U.S. equity market is essentially one large story stock, driven by a “Hero” figure – even if you don’t consider Chairman Bernanke is the same league as Moses or Ironman.
Via ConvergEx's Nick Colas,
At a recent client event, we got to talking about what U.S. equity was the best “Story stock.” It took me a second to catch up to this line of questioning. To me, the term is a derogatory one. A story stock is one with little more than an overactive PR department pumping out press releases. Such companies rarely have actual revenues, and when they do the bookkeeping is sketchy, at best. These types of investments rely heavily on the “Greater fool” theory, hoping that some poor sucker who comes late to the story will take you out of your stock at higher prices.
What our assembled group actually debated was something different: what stock best exemplifies the critical fundamental drivers which investors most value in the current market? Being the old codger at the table, I offered up the three best examples I could remember from the last 20 years on the Street as a template to consider what stock might fit the bill today:
- Chrysler in the early 1990s. Lee Iacocca had resurrected the #3 automaker from near extinction in the early 1980s, but took his eye off the ball as the decade progressed. When the Gulf War I recession came around, Chrysler didn’t even have the cash on hand to finish the development of the Grand Cherokee – a breakthrough product which could save the business. So Iacocca aggressively restructured the company, took his show on the road, issued a ton of stock at $5, and finished the truck. The stock went to $10, then $20, then $30 in just a few years. A cyclical recovery helped, but investors were consistently surprised by how the new – and American - company could develop cars and trucks with huge margins quickly and consistently.
- GE all through the 1990s. The old General Electric was always a strong company, but when Jack Welch took over he brought a new management discipline to an already well-run enterprise. He introduced a ruthless promote-fire process in HR, added Six Sigma analysis to manufacturing (and eventually services), and generally remade the company along cutting edge management practices. Every business had to be #1 or #2, or have a shot at getting there. He fired or sold off over 100,000 employees. Over his time at GE, the stock appreciated just over 4,000%.
- Apple under Steve Jobs, Chapter 2 (1998 2011). Everyone knows this story – Steve is fired by the Apple Board, wanders the wilderness, develops a new product, gets repo’ed back to Apple, designs the iPod, and rewrites the rules for everything from cell phones to movies to digital media. Like the GE case study, the stock appreciates over 4,000%.
If you sense a rhythm to these tales, that’s because they are largely the same. Essentially, they follow a mythology which is as old as storytelling itself. If you are a fan of Joseph Campbell or Carl Jung, you know the pattern. “Heroes” all follow the same path, whether they be from the world of religion (Jesus, Moses, Buddha and Mohammed), mythology (Prometheus, Homer’s Iliad and Odyssey), or even comic books/popular fiction (Tony Stark/Ironman, Harry Potter, any Star Wars movie). The model is simple:
- A seemingly ordinary man is called away from the life he knows to undertake a journey.
- On that journey he encounters magical challenges and is often aided by equally magical helpers along the way.
- After many struggles he eventually triumphs over the forces of evil.
- Eventually he returns to where he started and gives gifts/teachings to humanity.
Iacocca, Welch and Jobs may not seem especially magical, let alone religious, figures. But all of them took a symbolic journey to change their businesses or industries, fought to execute their vision, and eventually returned with a fundamentally changed company and a much, much higher stock price as a gift to their shareholders. Don’t stare too hard at the crass commercialism of the comparison – focus on how the narrative of “Story stocks” looks and feels very much like ones which resonate through history and culture. The pattern is the same.
There are other examples of the common structures of “Story” stocks. A few thoughts here:
- New Blood. Changes in management are the bedrock of many investment stories. Sometimes it is simply “Out with the old, in with the new.” But just as often this transformation comes from a spin-off, where previously subordinated management has the chance to run their own operation as a public company. These can be great situations, since they unleash an entrepreneurial spirit among the newly elevated management team.
- Resurrection. It takes a lot to kill a large public company. Usually, you need a deadly combination of lousy business strategy, a highly leveraged balance sheet, and a cyclical downturn. More often, you get “Zombie” companies, suffering from poor management or a product misstep but with reasonable balance sheets and an economic tailwind at their backs. And among these, a small percentage will shake off their shuffling gait and return to the land of the living. Apple, ironically, was such a company when Steve Jobs wasn’t at the helm.
- Conan the Barbarian. Big and brutish, but also agile and disciplined, “Conan companies” essentially destroy everything in their path. Other names are “Category killer” and “low cost producer.” Think Wal-Mart in the 1980s and 1990s, crushing small town department stores. Or Home Depot and Lowes in the 1990s doing the same to local hardware and building supply stores.
The power of “Story” goes far beyond stock picking, however; our macro policy driven investment scene in the U.S. is actually the most pronounced example of the genre. Fed Chairman Ben Bernanke may be no match for the Buddha or Tony Stark when it comes to heroic status, but his narrative is the same:
- The Financial Crisis forces Bernanke to take a journey, away from standard monetary policy and into a new and unknown world.
- The essence of his journey is to complete successfully what past “Heroes” failed to do: provide enough financial liquidity to stave off a second Great Depression.
- On his journey, he encounters challenges (Greece, Cyprus, Spain, etc) and is aided by like-minded companions (other dovish members of the Fed).
Of course, we don’t know how this particular “Story” will end. We don’t call someone a “Hero” until they finish the cycle and return with their gifts and teachings. But it is clear that, thus far, Chairman Bernanke has hewn to the classical “Hero” story pretty closely. After all, if creating +$2 trillion out of thin air isn’t some powerful magic to fight off the forces of evil, I don’t know what is. And in that light, it becomes easier to see why this market is so fixated with this story to the relative exclusion of all others.
It’s the biggest one in town.