"Understanding Earnings Reports" FPA Investment Knowledge Circle Presentation

Hello, good afternoon everyone and welcome to today's FPA session on the Investment Committee, Understanding Earnings. Most people in the investment world, they hear this earnings reports and earnings coming out on the individual stocks, and many times we don't take a lot of time to really understand what that means or how that affects our business. So we thought, what better topic is to present on getting a better understanding of what earnings means and how it affects our business and how we can explain them to our clients or different business partners. So on today's call, we've got Brian Dress. He's the director of research for Left Brain Investment Research. Brian has over 15 years of investment industry experience. And before joining Left Brain, he spent nearly a decade managing an independent portfolio of derivatives focused mainly in the oil and gas and commodities markets, but also in equities and fixed income as well. Brian has a BS in international relations with a concentration in international economics from Georgetown University in Washington, DC. And he's also a current candidate for the CFA designation. Brian resides in Chicago with his wife and two kids. And Brian also puts out a series on YouTube where he discusses different investment educational topics just to give a further in-depth meaning of what different investment topics mean. So feel free to follow him on that as well. But without further ado, I hope everyone enjoys the presentation. Happy pre-Halloween and happy pre-Election Day. And Brian, I turn it over to you.

Thank you, Freddie, and thanks to Nick and everyone else at the FPA for having me. I'm going to go ahead and share my screen now. Well, I just want to introduce myself a little bit. As Freddie said, my name is Brian Dress, Director of Research here at Left Brain. Just a little bit about Left Brain to give you a sense of kind of our perspective is we began as an RIA firm in 2014, moved over, we have a hedge fund as well, which we opened in 2016. And then last year, we opened Left Brain Investment Research, which is just, we're putting out our research to the public that we were already producing for those other two businesses. So we wanted to share some of that with the world. We have some analysts that we think do an excellent job in covering the companies that we cover. So we wanted to make it available to everyone. In terms of wealth management, we think managing clients' planning needs is very important. But, you know, at Left Brain, we emphasize the investment side. I mean, in an indexing world, increasing passive investment, we view the, the investment side as crucial for differentiating your practice. And, you know, part of that is, is taking a look at earnings and a little bit deeper look at how businesses run and the investments in your portfolio and having a little bit more knowledge in that direction. For us, earnings season is like the Olympics and Super Bowl all wrapped up in one, but 4 times a year. And we consider it pretty much the most important time on the investing calendar. And we know it's a little bit difficult for those who don't spend time looking through earnings reports. You may think it's a little bit more difficult than it really is. And what we wanted to do today in the presentation is demystify earnings releases and make it more accessible to you and your practice as you, as you work with your clients. Like I said, the time that's required is less than you may think. But we do think it is crucial for even the most casual investors to take a look at earnings, earnings calls, and earnings reports and gain understanding of their investments by using the available information out there. And also, you know, I'm happy to answer questions you may have throughout, and I can address those at the end if that makes the most sense. So let's just start with the basic question: what are earnings reports? By law, a regulation called Reg FD, companies are required to give earnings quarterly, and they have to give the same information to all investors by law. So it's a great opportunity for— it doesn't matter the size of your firm— to get a chance to look at companies and, and look under the hood of your investments. There are lots of— there's lots of information available during each earnings session, but not all of that is crucial to our viewpoint. And so you have to really sift through, especially if you want to be tight, you know, manage your time effectively, which parts of which information in the earnings reports you really want to focus on. In this presentation, I plan to help you sort through what is important and what we review in our, in our process, especially as the time and the capacity of our analyst team is limited. So we have to make some, some key choices. So like on the slide, it says there are a number of pieces of information that come out on every earnings report date. Important pieces of information include income statement, balance sheet, cash flow statement. Those come from the 10-Q and the 10-K, which are the quarterly reports and annual reports. We'll get to each one of these as we go through the presentation. MD&A, or management discussion and analysis, is a section in the 10-Ks and 10-Qs that we focus on here at Left Brain. The most important part is the earnings call transcript, and then also you have the company presentation. So there's a lot that you can learn from each company as earnings season progresses. And then we also wanted to talk a little bit to you about how you can find these materials as time goes by in each earnings season. For me and for our analysts, the first stop for us is always the investment relations site of any particular company. That's going to include news releases, company presentations, SEC filings, and sometimes earnings call transcripts, but not always. There's also plenty of services available that pull the numbers out of reports for easier review, and that includes FactSet, Bloomberg, Thomson Reuters, and a number of other services. If you go to SEC EDGAR, that's a database that holds every 10-Q and 10-K that's reported to the SEC each quarter. So you can start there if you're looking for those quarterly and annual reports. And finally, I put Google here because, you know, if you can't find the earnings call transcripts on the investment relations sites, you can, you know, Google's always going to help. You can also get reports from other analysts that can help you provide context to the numbers that all of us have access to. So as we said, the importance of earnings season is really the most important time on the investment calendar for our, from our point of view. And what we like about earnings season is, is the only time we can count on getting vital information about the companies in our coverage. Here we can analyze on a more qualitative level. Like I said, the quantitative data is available to everyone, but we need to put it into context. So in earnings season, we take a look at the earnings call transcript or listen to the earnings call, and what we want to know is what is management's tone. And a lot of questions like, how open are they? And are they adversarial or belligerent toward analysts that ask them questions? At Left Brain, prudent and proactive management strategy is important to us in all the investments we undertake and recommend. And for us, earnings season is— this is our chance to analyze these qualitative factors. And one of those factors is trends. We want to know about the long-term business trends because we're long-term investors, not only with a particular business on the micro level, but We're listening to, to these calls to learn about broader trends in an industry or even in the macroeconomy. So there's a lot of things that you can learn by listening to earnings calls. When you follow a company for 3 or 4 quarters in a row or longer, you start to begin to understand the strategy of that company on a deeper level. And you can test the promises and projections and forecasts that the CEO, CFO, and COO make as time goes by. And like I say here, the rest is noise. Other media appearances by a company's management are spin. What matters are the numbers and the, and the results. And these are the— this is what we learn at the time when we listen to earnings call transcripts. So let's dive a little bit deeper into what we're looking for when we, when we analyze earnings reports and all the associated documents. When we, when What we analyze in earnings season is simply a reflection of our personal investment philosophy at Left Brain, which is associated with an unabashed growth perspective. We're looking for growth investments. And so the concepts and characteristics that we have on the slide here are related to those that matter to growth investors. So when I study a company's results, I'm looking for these characteristics. We tell our analysts to sound the alarm when they see acceleration. Particularly in sales growth or profitability. Earnings calls help us project future results. Updates on competition and new customer acquisitions, and along with the cost of those acquisitions, help us to make these forecasts and put management's forecasts in context. And in companies in which we invest in bonds, because at Left Brain we invest both in high-growth equities and also high-yield bonds at times. Companies where we invest in bonds rather than stocks, We are meticulous in our attempt to understand the balance sheet and liquidity. On earnings calls, management will usually detail their deleveraging plans on names like this, whether it be through asset sales, refinancing, open market purchases of bonds, or anything else. And also, balance sheet and liquidity is really of utmost importance in today's world of COVID As you see— I'm sure you've seen— many companies are loading on debt to maintain liquidity at this time, and something that we're keeping an eye on. As we, as we study the companies under our coverage. So let's look a little bit deeper into each of these concepts and each of these pieces of information that becomes available during earnings season. You know, this is the way we train our analysts to go through this procedure. And it doesn't matter if they're looking at a company for the first time or if we're continuing on coverage on a name that we've covered for 5 years. The first stop is always going to be the investor relations site of a given company. And that's easily accessed by Googling the ticker symbol and then plus IR or investor relations. As you get more experience with working with investor relations of public companies, you'll notice that some sites are better than others. They definitely differ in usefulness, and some have everything, and others you have to do more digging to find what you need. Financial statements are always going to be on investor relations websites. Sometimes you'll find the earnings call transcripts or present earnings— I'm sorry, company presentations sometimes news releases, information about management, and other about us type of information. 10-Ks and 10-Qs, that's annual reports and quarterly reports. Like I said, every company that's public in the United States is forced to put out one of these reports at the end of every fiscal quarter. And I don't know, a lot of you probably have experience with at least looking at these at some level. They're long. I mean, some of these are 200 pages long. And, you know, even our analysts who do this every day, all day, we don't expect them to read through 200 pages with a fine-tooth comb. And I wouldn't recommend that to any of you. However, there is a section called MD&A, or management's discussion and analysis. And part of our procedure for our analysts as we train them is they always— we always have them look at MD&A. In this section, you're going to learn a lot of different, a lot of different concepts. You're going to learn about competitive dynamics, recent developments, management's view on what risks are the most immediate for the business in the coming years and quarters. So it's from the management's mouth. It's just like earnings call transcripts. There's a lot of value in learning about the strategy of the business and the trajectory of the business, both from qualitative and quantitative standpoint. I also want to point out to you that this MD&A section also contains footnotes to financial data. And sometimes companies can manipulate accounting to make numbers look better than they should in comparison to other companies in the same sector. So you always have to be on the lookout. You know, it doesn't— the income statements don't look the same on every company. So you have to look deeper and look into MD&A to see, you know, why does one company not compare exactly to the other. So there's a little bit of nuance there. You know, a couple of examples are some companies maybe realize lease expenses in one way or another different. So that makes it different when you compare companies one to another. Other companies sort of manipulate inventory or stock channel stuffing, that sort of thing. That changes the way the cost structure of the business looks. So just looking at the income statement, balance sheet, cash flow statement, there's value in that, but you need the context from the MD&A section. And as I talk about that context, I'm reminded of a quote I've heard many times in my years of investing, which is, "More fiction is produced in Microsoft Excel every year than in Microsoft Word." And we really take that to heart here at Left Brain. So, you know, of course the numbers do mean something, but the context is really more important. MD&A, that's the first place to start. We always have our analysts read those. Go through that, go through that closely. That's about 15 to 20 pages. And if you're, you know, just reading it quickly, you can get through it in 20 to 30 minutes. Our analysts take a longer time, but you know, they're taking notes and they got to write a report. So they're going to be thorough, but it shouldn't take you a ton of time. What's really the most important for us is earnings calls. You know, outside of the raw numbers everyone can access easily, I find the earnings calls the most useful segment of a quarter, a company's quarter early reporting. Like I said before, you may have to Google these. Some of them aren't on the IR websites, but you can usually find them on a number of consumer investing websites— Seeking Alpha, Motley Fool. Just Google it, you'll find it pretty easy. These calls put a human voice to the numbers. It's context. Like I said, numbers are important, but it's all about context. I've definitely drawn conclusions based on management's performance on these calls. Like I said before, the lack of openness, anger at analyst questions, anger at short sellers, all those sort of things are red flags for us when we read earnings call transcripts or listen to the call. When you see an earnings call, the first half is going to be management's prepared remarks, and then the second half will be analyst questions. Which is helpful to fill in some details or questions that you might not have thought. The reason I say sometimes these analyst questions are useful is often these questions are very narrow in scope, which we'll discuss later. There's limitations to the way that sell-side analysts on Wall Street look at a lot of companies. In our view, their focus is a little bit too narrow If you listen and read these call transcripts, you'll see a lot of the questions are very narrow in scope because many of these analysts keep very detailed financial models on each company they cover. So maybe it'll be a very small question that deals with maybe $2 million of revenue here, $4 million there. But I think from our point of view, I think that really misses where the value is in earnings calls, and that's the big broad themes. Um, as we mentioned, as I mentioned earlier, as you follow a business for a number of consecutive quarters, you will become acquainted with the narratives in play, and you'll gain a sense of whether management is delivering on those projections. So there's a number of companies that we've followed for, for many quarters, many years, um, and we get to know these managements. And so if you can trust management over time, say I've covered a company for 3 years and they always hit their marks, well, that means that the forecast they put out on next quarter's call is something I can take to heart more deeply than maybe a company I have less trust in. So there's really a lot of value in the narratives as it goes from quarter to quarter. And so now that we've talked about kind of what to look for, what documents to review, as you do go through earnings calls and earnings reports. I wanted to show you a few practical examples of companies that we've followed over the past few years and how earnings has such a major impact on the way that stocks and bonds and securities move after those earnings come out. A couple of examples we're gonna show you are both from Q2 and Q3 of this year. And the first is Salesforce.com, and that's ticker CRM. We followed this name for many years before last quarter's results, and I've always been very fond of this name. Strong management, strong financial performance, steady growth in the, in the 20s for over 20 years. So we don't get caught up too much in how it goes from one quarter to the next. Like I said, earnings growth has been very steady since 2000. But as you look at the performance of the stock on this chart here, this is the 6 months before the Q2 earnings that came out. You can see the candlesticks are CRM, are Salesforce stock, and the red line is NASDAQ. So you can see that the company was actually lagging a little bit, this NASDAQ recovery that has occurred since March of this year. Like we said, And we're going to discuss a little bit more as we go along here. Small divergences in earnings from expectations tend not to be market movers. And that's why we don't focus on this whole beat and raise concept that you see discussed on financial news and from Wall Street analysts. You know, did the company beat the earnings projection by 2 cents this year, this per share this quarter? That's not what we're looking for. We're looking for broader context, and trends as we, as we study these earnings. So the next slide will just show you quickly, this is about the impact of earnings. This is the biggest market-moving event of the year, each quarter for any given company. As you can see here in the circle, after the Q2 report, CRM stock jumped nearly 30% after earnings on projected improved projections of guidance better than expected revenue, and improved profitability. And like I told you before, and how we train our analysts, this is exactly what we're looking for. We're looking for acceleration in trends, acceleration in revenue growth, improving margins, improving profitability, uh, and also improved guidance. And this is why we don't play the small ball of can a company beat expected earnings by 2 cents. We trusted the theme at play at Salesforce. We knew what they were doing. We followed them for quarter after quarter after quarter. We trust the CEO, Marc Benioff. His projections tend to come to pass. And that's what we're looking for is a narrative that we can count on, like we have at Salesforce, a company where earnings growth is strong, accelerating, margins are strong, customer wins, plenty of customer wins and evidence, and other concepts that we're looking for that indicate strength of a stock like this. As I said, I wanted to use this example just to show you what the power of a positive earnings report is. Just a huge move on the stock after this earnings report. And it's because everybody started pouring into the transcript and seeing great results from the core business and also great results from MuleSoft and Tableau, which were two large acquisitions of the business. Over the past couple of years. And like I said, I wanted to talk to you a little bit about— we don't look at small— we're not playing small ball here. We're looking for broad themes. I want to make a slightly tangential point, which— that's why we don't use price targets at Left Brain. To do so, we think we're limiting ourselves to our imagination. In no way would I have expected a stock of a company this large and a large-cap stock to jump 30% in one print, which is what happened after Q2 earnings. And for us, the lesson here is that stocks often overcorrect to the upside. And many, many people may view a stock spiking like this as an opportunity to sell the stock, and we see it the opposite. We, we instead view this as a confirmation of our thesis after we read the earnings call. And from our point of view, this is the methodology that helps us to turn maybe doubles or triples into 10-baggers. You know, holding on to your winners, companies that you have confidence in the trend, and a trend that's accelerating. That's how you turn small winning stocks, small winning investments into large life-changing investments. Okay, with CRM in the background, we'll move on to our second example, which is Cleveland-Cliffs. And I wanted to talk about Cleveland-Cliffs and their Q2 and Q3 report just to kind of give you a sense of the concept I was talking about where we read through from one quarter to the next and how we use that sequence of earnings calls in order to analyze a business in a broader context. We've followed Cliffs for many, many years. We rode Cliffs bonds up from 10 cents on the dollar back in 2016 all the way almost back to par. So we know a lot about this company. Cliffs is a historical producer of iron ore for steel production. And the most pertinent detail in play here for the Q2 report was, uh, Cliffs has recently acquired AK Steel, which is one of the three biggest steelmakers in the U.S., and that's created a vertically integrated steel manufacturer that improves prospects for both sides of the business. Cliffs has found a dedicated end market in AK Steel, and AK Steel now has a dedicated supply of iron ore at a lower cost. And that creates not only revenue synergies, but also cost synergies for this business. And so when I read the Q2 report, I wanted to know more about the merger and how that was going to impact the business and both businesses. Actually, the Q2 report was our first chance after the merger to actually hear the details of how management planned to make use of their acquisition to improve business results. Um, also in the context of COVID the highlight of the call was the CEO reported to us that the closures of auto manufacturers in the US caused production to come to almost an absolute halt for Cliffs. But what, what he did was forecast what was to happen in future quarters, and this is where narrative comes into play. This is what we're looking for. He told us that he expected production to come back to normal in Q3 and Q4, and by the end of 2020, he expected production to be almost 100% once again. And so that gave us plenty of assertions to test in future quarters as we continue to follow this company. Like I say here, our report is— our intention is to follow up after Q3 to test the forecasts and assumptions that the CEO gave us on the call. That's the real value of these quarterly reports, is you're able to test these CEOs as time goes by. And also, they projected to us that free cash flow would be positive for the full year despite quite a contraction in Q2. So, you know, Q2 results were quite bad, profoundly bad for this business. But we were able to read through and say, okay, we have continued confidence in this company and its management to do well even in a tough environment. So let's move on to the next slide where we talk about the Q3 follow-up, which was last week. They had their earnings report. Like I said, we're here, we're here to test the assertions that we read in the Q2 report. And that's what we're doing when we read through into the Q3 report. CEO González was able to report that volumes were still slightly below normal, but continued to forecast that the, that Cliffs Steel business is on track to return to normal by the end of 2020. So this is exactly what we're looking for. We're looking for management able to back up the claims it made in the previous quarter. And that's, you know, that's the essence of what we're trying to do here. Like it says here, Volumes were still slightly below normal, but that's what was to be expected based on what the CEO told us in the previous quarter. And things were still on track to return to normal by the end of 2020, driven by a very strong auto sector. And we also saw 80% increase quarter on quarter in volumes of the company's most important product, which is flat rolled steel. And finally, most importantly, we learned about a positive free cash flow print of $150 million in quarter— in third quarter. That's driven by improved revenue picture and also cost-cutting measures that were discussed on the call. So put the company still on the trajectory to deliver positive free cash flow for the year. So again, this is what we're looking for. We're looking for a narrative that we can attach ourselves to, understand, and then the company comes along and, you know, fulfills the promises and forecasts that they're looking for. And that bears out in the market. For Cliffs, we don't deal in the stock, we deal more in the bonds for Cliffs, but I wanted to put this stock chart up of Cliffs just to kind of give you an indication of what tends to happen after earnings reports. We saw impressive stock movement in the wake of both reports, which I indicated here with the red arrows, both, which were right after earnings. Like I said, we don't follow the stock of Cliffs. We follow the bonds. But they tend to move— the stock and the bonds tend to move in at least a relationship that has correlation. But the point I'm trying to make here is you're going to see an indication that when an earnings report comes out that's positive, it's not going to be generally a one-day concept or a one-day phenomenon. As you can see here, back after Q2, that first red arrow in the center of the screen, um, that put the stock into a pretty strong uptrend, uh, for pretty much a month after that earnings report. And you can see also at the end of Q3 a little bit of a similar pattern, but we have to see how that plays out over the coming weeks. And then finally, we want to talk a little bit about what's wrong with the Wall Street approach as compared to the way we approach earnings. Like I said a few times during this report, we're not into the beat and raise game. We're not into the, we're going to raise price target when the price of the stock moves up, we're going to raise our price target. That's completely missing the point of what's available in earnings reports. Like I said, broad themes, narratives that we can follow along with, context of data. That's, that's what we're looking for. And that is not what we're Wall Street sell-side analysis is providing to you. I'm sure some of you have read a number of Wall Street analytical pieces over the years. And we just don't think that they cover what they should. And like I said earlier, when we're talking about the calls, and you read the analyst questions, you know, sometimes they get it. And sometimes they're asking about broader themes and That's great. As long-term investors, that's what we want to see because we want to know what's this business going to be doing in 5 or 10 years. But for the most part, when you read the questions from the analysts, they're a very narrow scope. It's like, what are sales going to be of a given segment next quarter? And that sort of thing, which it's interesting information, but We think it's really missing the point of the value of these earnings calls, which is learning more about management, what is their strategy. If you want to be a long-term investor in a particular stock or bond or any other type of security, you really need to have a confident thesis. That really starts with management strategy. It starts with, does management follow through on the forecasts and projections that they give to analysts and to the broader investing public. So like I say, management is so important to us as we make our investment decisions. And so this is our best chance to test management 4 times a year. And then finally, a little bit, a little bit more about price targets. It's anathema to us. We don't like price target. We're not going to give you a price target. As much as anybody in the media may ask us, or any of our investors or subscribers may ask us, we just won't do it. Because as a long-term investor, to give you a price target that's maybe 25% above the market price, it just misses the whole point of what we're trying to do, which is make multiple, multiple winners on stocks and bonds. So it just It doesn't make sense to do price targets. We really hate the concept of sell discipline, which you hear a lot of the times is, oh, wow, the stock has really run a long way. What's the sell discipline? Or you take some off the table. We look at it completely the opposite way on earnings. When an earnings call comes out, when an earnings report comes out, and we're learning that trends are accelerating, we're learning that Everything's going well, projections are being hit or exceeded. That tells us that that might be time to even add exposure. There's not that many great companies or great investments out there. So when you get your hands on one, you don't want to let it go. You could have sold Amazon at $500 feeling very smart about what you did, but you would have missed so much more upside beyond that. So that's the type of upside we're trying to trying to capture with our analysis. That means getting away from the whole price target concept, the concept of sell discipline. We think what you should do is sell your worst holdings, not sell your best holdings. You should be buying more of your best holdings. Then finally, this is just a little bit of a schematic that gives you a sense of left brain and how the way we're set up. We have this left brain investment research and it's set up to provide research to both our wealth management and our capital management business. The point being is that we wanted to provide the information and the analysis that we were getting for our own clients. We wanted to bring that to the broader investing public. So that's the point of the entity that I had on the research side. And with that, I'm willing to take questions.

The first question is, are there any factors that can be used to judge the character of management? And the stewardship of the company?

There are. There's a book called The Outsiders, which I read as I got started with Left Brain, and it's called— it's capital allocation is the most important thing that a manager can do. So that means when your stock price is well above what you think it should be and you need capital to grow the business, it's time to sell stock. It's time to issue more stock. When debt is super cheap and your stock is low, it makes more sense to take on debt. That's what we want to see. We want to see prudent capital allocation from people that run businesses. Also, like I said before, is just, can you trust the narrative of the company? That's all about management. Does management follow through on what they project. And that's what you need to spend time getting to know these companies, is that's what you gain from doing that.

Okay, next question is, do you consider the compensation plan of management and the incentive structure of, of management? How do you judge skin in the game?

Yes, we do. Those are important factors. We do look at compensation, and what you find is in the more growth companies, it's more oriented towards stock, which we prefer. We don't love seeing a CEO making $20 million cash in a year. It just doesn't line up. And so we like founder CEOs for the reason that you mentioned, skin in the game. We like a company called NVIDIA. I'm sure we all know NVIDIA. The man who founded the business is still CEO 25 years later and still owns over 4% of the outstanding shares. So we're looking for alignment of interest. When we see a CEO that still has most of his or her net worth in that name, we feel a lot better than when we see one of these professional CEO types that has you know, a handful of shares and is getting paid mostly by, by cash. So yes, that's a good point. We definitely do take a look at those, those factors.

Okay, there's a couple more questions in here. And just want to remind everyone on the call, we still have some time. So feel free to enter your questions into the chat box, and we'll read them from there. So next question is, how do you assess whether management is managing earnings?

That's a good question. So that's why we go through MD&A. That's why we're spending some time going through the numbers. You know, you're going to learn, you got to see, is inventory— are they managing inventory? Do you see big spikes in inventory one quarter and then big contractions in inventory the next quarter? Those are the type of managing— those are the type of moves you'll see with managing earnings. But like I say, over time, it's difficult to continually manage earnings over time. So if you're watching a company for 4, 6, 8 quarters, I think it's going to stand out when earnings are being managed. But we, as growth investors, we're a little bit less focused on earnings and more focused on revenue, which is much, much harder to manipulate.

The next question is, do you place earnings reports within the macro context, and does the virus matter?

Yeah, the virus does matter. And this is something you'll see in every earnings report right now. There are going to be questions of COVID addressed. Every company has changed their strategy in some form or fashion to address the pandemic. And so it's just another data point where you can learn more about management. If you assess management strategy for COVID and it makes sense, you're going to feel just that much more confident about a company's strategy. Whereas if what they're doing doesn't make sense, the opposite. So yeah, the pandemic does matter. I'm sorry, what was the first part of that question, Freddie?

Placing earnings reports within the macro context.

Yes. I didn't really mention this. But when I— for instance, we follow a number of companies in the cybersecurity business. So if I read through one earnings report, that's going to tell me a lot about the next earnings report. And as you start to get familiar, say, I think we follow about 6 cybersecurity companies. When you hear 1 or 2 tell you, okay, these trends are in evidence, we're accelerating revenue, I think it's very reasonable to expect the other 3 or 4 to tell you the same thing. So That's a good way to use the, the broader macro context. Difficult, more difficult, but sort of sector or industry specific. Yes, that is very useful to, to compare a few in the same sector.

And the next question also has to do with COVID too. Do you think Wall Street adjusted earnings expectations appropriately for COVID?

I guess the answer to that for me would be I don't care, um, in reality, because we don't really focus on— like I said before, we're not into the beaten race. Um, they may or may not have adjusted correctly, but we're watching micro trends, we're watching individual businesses. Um, and so we're going to keep our focus on that and not worry about what other firms' expectations are for a given investment. We're going to stick with, with our plan, with our approach, and we're going to use these earnings reports to fill in the details behind, behind that approach.

This next question, I know there's been some discussion about changing this one, but do you think quarterly reports are too frequent?

It's a yes and no. I like getting as much information as possible. I like to hear from management each quarter. That's helpful. I think I understand the essence of the question, which is companies don't necessarily manage for the long term, but they tend to manage more for the next quarter or the next couple of quarters. From that point of view, I can understand the urge to go to more of an every 6 months or every year reporting. But like I say, with growth stocks, it's a little bit less of that managing for earnings, and we're more interested in are the trends intact, especially for revenue growth and gross margins. So I kind of have to give you a mixed answer on that question.

Next question is, is a well-thought-out narrative the most important factor? How do you distinguish between a good narrative from a sales pitch?

It's all important. I talked a lot about narrative throughout this presentation, but it's all in the context of numbers. I mean, you can't fake the numbers at the end of the day over a long period of time. Like we said, you can manage over a particular quarter, you can manipulate earnings and make them look good. But no, the numbers are important. The narrative provides context. But the point I was trying to make is, We like to hear management's take and management's beliefs, but it's a trust but verify. That's why we like to follow a company for multiple quarters because we can really test, are those narratives real? Yeah, it could be a sales pitch. Like, these guys are sales guys. CEOs are salesmen at heart. So we have to look through that. But like I say, it's all about trust but verify. We go back, we test those assumptions. I'll read the previous report before I write the next report, and it all keeps that into context. And that's how we look through, is it a sales pitch or is it a true narrative?

There's, uh, there one more question popped in if we've got time. Um, yeah, it says, to what extent do you interact with management?

Uh, I tend not to interact with management much, but, um, once in a while we'll send off a note to investment relations. And, um, you know, it's different between companies and the bigger companies are more difficult. But if you have a question, a specific question, they can generally answer it for you, with the caveat being that with Reg FD, they have to put everything out to everyone. So don't expect to get, get anything inside, but they are, they tend to be pretty responsive in these IR departments.

One more question just came in. Is a dividend policy Is the dividend policy an important indicator?

Yes. Again, we're growth investors, so we're not here for dividends. So a lot of the companies that we follow won't be dividend or will be de minimis. But just to take it a little bit over to the bond side, a lot of these companies are heavily leveraged. And as bond investors, you stand above equity in the capital structure. Every dollar that's paid out in dividends to equity holders is a dollar that won't be able to be paid to you as a bondholder. So on the bond investments, we look at it completely the opposite way. A lot of times when we see companies that are too levered, one of the first levers is to cut the dividend. And that's something we look favorably upon when we're looking at bond investments.

Well, thank you, Brian. I think that's, that's it for questions, and thank you very much for your time in the presentation. Again, I hope everyone enjoyed it. Thank you to all my fellow FPA members for attending.

Yeah, thanks everyone for having me, and of course, everyone stay safe, please.