Have you ever tried to value a company by its press releases? Of course not. But maybe you should.
Before you start typing your hate mail about the dot-com days of outrageous valuations based on nothing more than hype, hear me out. Clearly there is no substitute for doing your financial homework when it comes to evaluating stocks. If you haven't yet learned the basics I urge you to visit our Fool's School. It's a great place to start.
But the financials really are just the beginning when it comes to stock valuation. That's the science. The numbers paint a partial picture of the long-term prospects for a company. The rest -- valuing the quality of management, deals in the pipeline, innovations, and business strategy -- is art. And doing so often comes back to -- yep, you guessed it -- reading press releases.
Post-Enron, every investor should know that what a company says is practically as important as what it reports in the financials. Like it or not, press releases are part of the stock valuation process.
Of course, there's no price-to-press release ratio, or worthless-to-meaningful content ratio. So how do you measure the news a company puts out? Simple. Let's play Press Release Bingo!
Get your scorecards
Press Release Bingo isn't too far removed from its classic parlor game cousin. The object is to find a company that is announcing meaningful business progress, which may indicate a stock for further study. Once you've run the basic numbers, it's time to play.
First, you'll want to create a scorecard, because you'll be evaluating the last five non-earnings press releases of the company you're interested in. Each release will be scored according to how it answers three questions:
- Is there money being paid to the company?
- Is there a happy customer featured?
- Is the news about something truly groundbreaking?
If you'd like you can also give bonus points for unusual endorsements (i.e., celebrities, hard-to-find analysts, etc.) or especially good executive quotes.
Five releases, three categories each, one point for each 'yes' and zero for 'no'. The maximum score, or Bingo, is 15. Still with me? Good.
Grab an ARM chair
As the Fools on the Card & Board Games discussion board say, the best way to learn a new game is to play. That's just what we're going to do. Pull up a chair and read along. You can even play, if you'd like.
I've decided to use Motley Fool Stock Advisor pick ARM Holdings (Nasdaq: ARMHY ) for this round. If you want to play along, look to your right, the related links include all five announcements we'll use.
Release 1: ARM cancels deal for Triscend
Just a few days ago, ARM decided not to up its bid for Triscend, which creates systems on a chip. The deal was first announced in late January. The press release at that time hyped the move as a way to take advantage of anticipated demand for 32-bit microcontrollers for small digital devices.
Using our scoring system, I come up with one point, because ARM saves money it would have spent on the acquisition. Fools participating in the ARM discussion board also seem to think the deal was overrated to begin with.
Money saved is money earned.
Release 2: Oki Electric licenses ARM technology
As an investor, I always love to see headlines that say something has been bought. But the headline of this announcement may indicate more than what's actually here.
First, the deal is an extension of a long-standing partnership. Second, the agreement "builds on" ARM's presence in digital consumer and automotive applications. Probable translation: This isn't new ground for us, and any revenue we make is probably going to be incremental.
On the other hand, clearly Oki Electric -- which is publicly traded on the Tokyo exchange -- is a happy customer. Witness the quote: "As a key industry standard technology, we have selected ARM microprocessors... and have been expanding our portfolio accordingly." That's pretty solid, and it's enough to post a point.
Release 3: ARM debuts new cache controller
This is the big one. ARM says that its new controller will extend the battery life of new mobile phones and that Motorola (NYSE: MOT ) has licensed it. A statement a little later in the release talks about how Motorola has been "using the ARM architecture for more than three years."
Get that? Let's count 'em up: There's money coming in the door, a happy customer, and what appears to be a groundbreaking innovation. Wowsa.
Release 4: Magma and ARM release reference implementation
This release contains too much industry-specific jargon to sound truly important.
Release 5: ARM and Imagination Technologies combine for 3Dsupport
It's not clear whether ARM will quickly see revenue as a result of this deal to bring 3D to mobile devices. Indeed, the news is all about what could be.
The release implies that 3D support in ARM's designs would create demand for chips for new mobile gaming devices. That's an interesting vision, and supporting quotes from some gaming industry players makes the announcement score for innovation. (Portable 3D Sony (NYSE: SNE ) Playstations or Microsoft (Nasdaq: MSFT ) Xboxes, anyone?)
No Bingo... but still impressive
How did ARM do? With a total of six points over five releases it scores right in the middle. I usually consider 1-5 average, 6-10 good, and 11-15 outstanding, indicating a stock that immediately deserves more investigation.
Does this mean I think ARM is somehow mediocre? No way. In fact, I'm thoroughly impressed. It's rare to see a press release score in all three areas, and ARM had one last month. That's great momentum.
But, remember, momentum alone shouldn't be the basis for a stock idea -- it's merely an indicator. And Press Release Bingo is a very subjective tool. Some press releases can score well even when the company behind them isn't worth much. Consider fellow Fool contributor Dave Mock's recent story about Calypso Wireless.
A resident of the Pink Sheets, Calypso revealed a patent for connecting Wi-Fi and cellular wireless networks for mobile phones. Score 2 for the release: one for the license fees from the patent, and another for the technology breakthrough. But Dave's right, Calypso doesn't appear to be a stable firm. As cool as the release is, the context is important.
Stock investing is always a judgment call, especially with small caps. Fortunately, there are a number of great tools to help select great companies to buy. Press Release Bingo may be one of them for you. Or not. Just remember that, whatever you choose, there's no substitute for Foolish fundamental analysis.
And that's no hype.
Motley Fool contributor Tim Beyers has yet to win at Bingo despite years of trying. Fortunately, he's a little better at Press Release Bingo. Although a longtime public relations consultant, he has no stake in or relationship with any of the companies mentioned here. The Motley Fool has a disclosure policy.