Capital Markets / Investor Relations in Two Minutes or Less
Short Attack Case Study: Cerner
When an investor initiates a short attack, he or she needs to strap on their armor and be prepared for several blows to the most sensitive parts of their body.
In my case, my face still remains on dart boards in executive offices in Kansas City, home of Cerner’s corporate headquarters.
The 2015-2016 timeframe proved a fertile time for shorting Cerner for several reasons.
Key Issues:
1. Long-Term Guidance: Adjusting the basic assumptions of Cerner’s long-term guidance yielded a multi-billion-dollar variance between guidance and what was likely to occur.
2. Story Shift: The company had beat and raised for 60 straight quarters, but was shifting to a miss and lower trajectory because guidance was too bullish.
3. Arrogance: Management felt their track record spoke for everything and that no one could rightly question their assumptions or guidance.
Key Trigger:
1. Cerner won the Department of Defense EHR contract in 2Q15.
2. In 3Q15, the company posted its first significant earnings miss.
3. The stock went from $73.50 to $50, returned to $71.50 and back to $48.
A great call and a great trade for many in 2016!
Key Learnings for Public Company Executives and Sell-Side Analysts:
1. Long-Term Guidance: Have you done the following regarding your long-term guidance:
(1) pressure tested the assumptions?
(2) Has anyone questioned you?
The company needs to be prepared for an enterprising analyst that will pressure test and play with the given assumptions. Cerner was not prepared for my pressure test and significantly opposite conclusion.
2. Timing: A Sell call for an analyst requires perfect timing. If you are early or late, you open yourself up to criticism and allow the company in question to attack your credibility. The company will send you nasty emails anytime you publish and ultimately use these to build a case to have you replaced. Ultimately, you get a stub bonus and a who loves ya baby from your director of research!
3. Attacks: Millionaires and Billionaires only attack and destroy you when you are right. Putting a Sell on a well-loved company means everyone loves them and will hate you. People will discredit you and attack you for the unpopular view. The experience is difficult to live through and equally difficult to recover from, too.
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