If you cultivate an inside line to a public company’s performance and then trade on the information, chances are you’ll face a federal indictment for insider trading.
But there are a number of sometimes quirky indicators — like the “tells” gamblers look for to know when an opponent is bluffing — that can give you important insight. Whether counting the number of women on a board or looking for a stadium graced with the company name, these signs, while not completely predictive, are great early warning systems.
Big and savvy investors tell Ric Marshall, an executive director of research at investment decision support company MCSI, that “some of this kind of information is considered helpful and of interest.”
Best of all, you don’t need a subscription to a pricey service. It’s all public information.
Here are some of the secret signs that insiders look to for help.
One of the most peculiar tells is the golfing activity of the CEO. The game is associated with business executives, but a study from researchers at Miami University, the University of Alabama, and the University of Tennessee found too many rounds correlated with poorer-than-average return on assets.
The trick was to check the Golf Handicap Information Network (GHIN) of the U.S. Golf Association, in which players record their results to justify their handicaps. The researchers found 363 S&P 1500 CEOs in the database. The most active played an average of three times a month. Their companies had a return on assets 20% lower than the average of all the CEOs’ companies.
And, it just so happened that those heavy golfers were also the CEOs most likely to have a short tenure.
The GHIN only shows the last 20 games, but it gives dates, so you can see how frequently a CEO plays. Of course, there’s no requirement to enter games into the handicap system, so it’s not clear how long this particular tell might be telling.
A female CEO is often a sign of a company in trouble. Not that their work has caused the woes. Rather, as a number of studies show, women don’t tend to get put into the top spot until a company is already in trouble.
It’s called the glass cliff, a term coined in 2005 by psychology researchers Michelle Ryan and Alexander Haslam. Women tend to be appointed as chief executives “in conditions of relatively poor company performance.”
When things have been good at a company, “there’s no perceived need to change its pattern of male leadership,” researchers Susanne Bruckmüller and Nyla Branscombe wrote in the Harvard Business Review. “Only if male leaders have maneuvered an organization into trouble is a switch to a female leader preferred.”
The reason women (and minorities) will take these sorts of promotions that white men generally turn down is a lack of equal opportunity at a CEO position.
“[They] have a disproportionately harder time to move up the leadership ladder,” said Terence Mauri, entrepreneur in residence at the London Business School and author of The Leader’s Mindset: How to Win in the Age of Disruption. “They’re more likely to say yes to risky opportunities because they think it’s their only choice.”
White men with wider choices might pass on an assignment that could wind up as a bad resume addition.
A penchant for spending not directly related to business can indicate a problem. “Things like an investment in a sports stadium that results in the stadium being named for the company, anecdotally in the past I’ve seen that as a fairly strong indicator that there may be the wrong priorities at the CEO level,” Marshall said.
Or the company may suddenly invest in art, antiques, or something else without any direct connection to what the company does.
“Sometimes you see that when the CEO has a sense that the company has made it, they’re successful, [and] the stock is doing well, they have money to spend,” Marshall said. “That may have to do with the CEO’s attitudes and, sometimes, arrogance,” even — or especially — if the spending is rationalized as PR and marketing.
Celebrity Board Members
The experience and knowledge of board directors, who are supposed to oversee management and represent shareholder interests, are important considerations. Check the backgrounds of the individual directors.
“There are several hundred directors that we’ve flagged for past involvement with a bankrupt company,” Marshall said.
It’s not a strong negative, but wouldn’t you want to know that a director was on the board overseeing a company when it went under? If their judgment was bad before, maybe it could be again.
And putting celebrities on a board can be a mistake.
“To have a famous actor or sports figure on an audit committee where they have no background in accounting or finance is a scary thing,” Marshall said. “And yet, that used to be a fairly common practice.”
Not all “tells” are negative, however. Consider the scenarios on the following slides…
Political Board Members
Former politicians as directors can be good news. Companies with ex-pols on their boards “are associated with better market-based performance,” particularly if the company is in a heavily regulated industry,” found Professor Amy Hillman of Arizona State University.
Female Board Members
Women as board directors are good news. In a multi-country study, researchers from Indiana University and the Technical University of Lisbon found that gender diversity on a board correlates to better stock prices. “[O]ur results indicate that a gender-imbalanced board signals to shareholders that management is less independent and more entrenched, resulting in lower firm market values,” they wrote. And that means lower share prices.
And just in case you’re tempted to write off every company with a glass cliff-inspired female CEO, there’s this: Women-led companies have been shown to outperform the average S&P 500 by three times.