From: Walter Watts (wlwatts@cox.net)
Date: Sun Feb 10 2002 - 10:30:34 MST
I hereby coin a new phrase, followed by a flawless specimen of its ilk.
"pseudoscientific infotainment"
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New Earnings Fear: Verbosity
By Joanna Glasner
2:00 a.m. May 9, 2001 PDT
Whoever coined the phrase "length matters" probably didn't have
technology earnings reports in mind. Maybe they should have.
New research from Merrill Lynch finds a strong correlation between the
length of a tech firm's annual financial statements and the company's
performance on the stock market.
In most cases, researchers concluded that companies with longer reports
perform worse.
"Oftentimes, the longer the document, the more messed up the business,"
wrote Steve Milunovich, Merrill Lynch's global technology strategist, in
a study released Tuesday.
He found that companies with long annual reports, known as 10Ks, often
used the space for detailed explanations of write-offs and other unusual
items that dragged down earnings.
To carry out the research, Milunovich compared the file sizes of annual
reports submitted by companies in the Merrill Lynch 100 technology stock
index. He then compared that data to the performance of the stock in
their most recent fiscal year.
The findings? The study concluded that 83 percent of companies with the
shorter annual reports (those occupying less than 300 KB of file space)
outperformed the index.
On average, stocks of companies in the under-300 KB group, which
included Adobe Systems (ADBE), Sungard Data Systems (SDS) and Unisys
Corp. (UIS), declined by
52 percent in their most recent fiscal year. Although they didn't
exactly do well, the group's performance was above average for firms in
the index, which took a beating in 2000.
Companies with long annual reports (over 500 KB), on the other hand,
sported an average decline of 77 percent in their most recent fiscal
year. Only 18 percent of companies in that category, which included
underperformers Lucent Technologies (LU), Nortel Networks (NT) and
Brocade Communications (BRCD), outperformed the index.
Researchers advised that the results be taken with a grain of salt.
Often there are other factors besides complicated explanations of losses
that can account for a lengthy annual report. In the case of AOL-Time
Warner, for example, myriad pages were required to explain the process
of merging the Internet and media behemoths.
Also, there are exceptions to the generalization that long reports
signify poor performance, and vice versa. Cadence Design Systems (CDN),
for example, filed a
508 KB annual report and only saw its stock drop 10.4 percent in fiscal
2000. Foundry Networks
(FDRY), which filed a 245 KB report, saw its stock plummet 94.8 percent.
Even so, Milunovich believes there's a lesson to be learned in all this
Kilobyte-counting. Investors, he said, should beware of annual reports
with too many footnotes. It's not that all footnotes are bad, he said,
but in general, the longer the annual report, the more complicated the
business is, and the more issues that need to be explained.
Merrill Lynch cautioned, however, that the experiment was "less than
scientific." Only 48 of the 100 companies in the index were included in
the study. Others hadn't yet submitted annual reports, had irregular
fiscal years, or were based outside the United States.
-- Walter Watts Tulsa Network Solutions, Inc. "To err is human. To really screw things up requires a bare-naked command line and a wildcard operator."
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