THE ELUSIVE "BUY-SIDE WHISPER" I was speaking with a junior analyst today about earnings set ups. He mentioned that he was using credit card data to forecast prints, and while that approach was very helpful in calling the numbers, it wasn't helpful in calling what ultimately
matters - the stock price reaction. So it's time to dive into the ever-elusive buy-side whisper. LET'S GET ONE THING STRAIGHT Divining the buy-side whisper is very much an art. There is no magical Bloomberg chat where the incremental price setters in the market (large LOs,
scaled HFs, and pods), are entering their EPS estimates for the quarter in some illuminati-esque "buy side consensus". Only a couple times in my career have I owned a large, publicly disclosed 13F position and had someone take my temperature on the print. Am I really going to
tell them, "on a 6% comp I'm buying more and on a 2% comp my thesis is broken and I'm selling"? I mean, I'm not an idiot. Both times, I've told them to kick rocks. Sure, I'll share notes with a likeminded investor who I know & trust and know won't be shooting against me
if the risk case hits. But if you have been searching endlessly for a scientific approach to buy-side consensus, it simply doesn't exists, because the incremental price setters actually have a disincentive to share that, if they are smart (and they are).
IF IT'S IN THE PRESS, IT'S IN THE PRICE The old adage of the efficient discounting mechanism holds true here, and extends. Particularly for earnings prints, the big moves come with a SURPRISE FACTOR. If the news is known, it's baked into the price. Extend that to the financial
markets of 2022. If it's in the IR messaging, the alternative data / credit card panel, in the tone of the conference meetings, Tegus notes, etc it's in the price. I'm guessing for every dollar of alpha that alt data has earned people on prints, it has probably destroyed $1 (or
more) of alpha. More and more, these elements of primary research are reflected almost instantaneously into market prices. And in a world where quants are digesting many of these same inputs, that alpha is captured either there more quickly, or by the aggressive pod PM with
an active, $2-3bn portfolio that is aggressively trading on these incremental insights. So this game is a hard game to play. Is it hopeless? Not necessarily. MY FIRST FILTER: BUSINESS MOMENTUM My first filter on a buy-side whisper comes from my philosophy around data point
extrapolation. I've come to a strong view that markets tend to extrapolate the last data point more often than not. So while I care about beats / misses vs. street, my first filter is actually business momentum. Stock prices reflect the discounted value of 30+ years
of cash flows. How are we ever supposed to have conviction in the forecast of those cash flows? As a market, we don't, and we tend towards taking the most recent data points & extrapolating those forward, hence the tendency of markets to trade peak on peak and trough on trough.
So, simplistically, I often view the buy-side bar as a continuation of the current biz momentum. If it's growing 5%, start there. All else equal, on a print, I'd rather own a 5% base rate revenue comp accelerating to +7% than a 10%+ base rate comp decelerating to 8%. Many of my
biggest whiffs on quarters have been business momentum decelerations. MIND THE BASE RATE For various reasons, I find that base rate dynamics on earnings prints tend to persist. Some companies continue to beat, and stocks trade up 2/3 of the time on those beats (UNH comes to
mind). Other stocks just continue to disappoint (5/6 last PTON Q's have been stinkers). While it doesn't work all the time (nothing does), I've learned to mind the base rate, and study situations that have had a historically higher propensity of blow up on prints. I want to avoid
those or be much more cautious of heavy positioning into prints. BUT, YOU HAVEN'T TALKED ABOUT THE WHISPER YET Ok so I've talked about two adjacent elements - biz momentum and the base rate. Ok, so we agree there's no illuminati sponsored buy-side whisper. How do we go about
estimating the base rate. DATA / EXPERT NETWORKS. More and more these days, what is spit out of the credit card panels and contact networks seem to actually set the buy-side whisper. So you might think you've found a variant perception, but what you've actually found is the
buy-side consensus. SELL-SIDE. The sell-side has different incentives than the buyside. There job is to become top II, not have the freshest EPS estimates. And whipping around the EPS estimate w/ a follow-up note after every data point is just not realistic. So,
by nature, the sell-side number is designed to be a bit stale. But not EVERYONE on the sell-side. I've found certain sell-side analysts do their job with a buy-side lens (in healthcare, Pito Chickering, former Kingdon, Justin Lake, former Viking, and Kevin Caliendo, former SAC)
were always super helpful conversations heading into prints as they have a buy-side mentality and a network of buy-side clients (who again, aren't likely to give them exact KPIs, but if skilled the analyst can glean tone). In HC, there are also a few great spec sales people who
are just such great people and really good at getting clients to talk (Greg Gennova, Asad Haider, Dan Lundquist) that they are really good at becoming a nexus of information. So tap into those networks. MANAGEMENT. More and more, meeting with management to assess "quarter
tone" feels like "in the press, in the price" work to me. Listen, if sell-side is modeling 10% growth next year and IR is walking you to 15%, the bar is 15%. You aren't IR's special friend. IR is telling every client that, and that's getting baked into the price. So don't think
you have a variant perception because you called IR, then complain that mgmt walked you off a cliff when the print is 13% and the stock dumps. POSITIONING: 13-Fs & MORE 13-Fs can give you some visibility on positioning, but they have an obvious weakness (time lag). If the
average pod is turning the book 5-8x a year, the 13F is pretty worthless. So how to I assess where people are positioned? I have a "positioning monitor" where I monitor the 10 most popular pair trades in my sector (spec sales can help you here), and I will look at any
quantitative VIP long vs. VIP short measures (goldman has this data, and many funds have it internally). When that goes upside down, I look at my pairs. In healthcare for a long time, LH was a popular long, DGX was a popular short. On HF de-grossing days, invariably, LH would
underperform LH by 50-100bps. To me, that downside de-grossing leverage is a much more real time monitor of where HFs are positioned. On a print, I'm more willing to own a popular HF short than a popular HF long (when the HF hotels miss, that's when it really hurts). CONT'D
READING CHARTS One good temperature check of the "buy side whisper" is simply the stock chart. And not just the chart, but the idiosyncratic move, and the P/E expansion. Where there is positive expectation building, if it's truly in the price, that is probably reflected in the
stock. I like to disaggregate a stocks' move into EPS revision and P/E expansion, which gives a clearly view of the drivers of a stock (will walk through this at some point). But the NAIVE view of prints is this. I did what I thought was primary research - talked to IR, looked
at CC panel data, had 3 GLG calls and talked to the sell-side. I get excited because I have this great unique thesis. I own stock, it hits my numbers, but that stock trades off 10%. What happened? Well, the work you did was not actually all that unique. That set of work is now
closer to standard, and without the surprise factor, there was no incremental buyer on the print, and traders used earnings day liquidity to cycle out of the name. And, perhaps the stock had already outperformed on an idio basis by 15% in the run up to the print.
THE BAR IS ADAPTIVE The "buy side whisper" is also very much a moving target. Particularly during earnings, the bellwether moves the bar rapidly. When UNH prints, that changes the bar for CI, HUM and ANTM. Same in other sectors. This is a game of multi-dimensional chess.
MY LEARNINGS Two things I've learned by playing this buy-side bar game. look for counter-positioning surprise factors. Find situations where there is little HF ownership, beta shorts, low expectations, and a small possibility of a positive surprise. In reality, your
downside might be small and your upside large. carefully consider what is "known" and what is not. Raise the bar for what you consider to be proprietary. Much of the work you think is a variant perception actually just cumulatively sets the buy-side bar. Hope that helps!!!