Is the incredible power of the boutique research house MScience to wreck stocks with negative forecasts about sales about to end?
Periodically, you will see a stock just come crashing down and you will hear a report, typically through an outfit called Street Account, that a research firm, MScience, has learned that sales are going to be weaker than expected.
It's almost impossible for any company to refute as typically they are in quiet period, meaning they can't really address these issues because they are right before a quarter is about to get reported. So the stock gets shredded in an unanswered fashion.
But the CEOs of the country are beginning to wake up to these hitjobs and they are mad as hell, and I don't think they are going to take it anymore, especially when the MScience call is totally wrong.
That's exactly what one of my favorite CEOs, Jane Elfers of Children's Place (PLCE) , did last week. I think it might serve to blunt the power of MScience to impact a stock.
Elfers, after still one more outstanding quarter last week, started her conference call in a very strident fashion: "I want to briefly comment on some outside reporting that has become commonplace in our sector," she said. " I am referring," she continued, "to credit card data and other one-off reporting. For example, we received calls from several of our analysts on April 18 regarding a report that was issued from MScience, a firm we have never heard of. "
Now, listen to this. MScience, she says "reported that we were in jeopardy of missing our consensus net sales and comp for the quarter as they estimated we would only deliver $416 million in net sales and a flat-to-1% comp. As you saw this morning, we delivered $437 million in net sales and a 6.1% comp just 12 days later, when the quarter ended."
Elfers then lowered the boom: "we wonder if the M stands for mistaken."
I totally get this. Back on April 7, the stock of Domino's Pizza (DPZ) fell more than 5% when MScience said the company's domestic same store sales Growth would be "well below the rough consensus estimate," according to CNBC.com the day of the raid.
Once again, Domino's was helpless. It couldn't respond to any inquiry about what was wrong as the stock plummeted from $186 to $175. It was handcuffed by the quiet period. Plus, companies don't want to respond to this kind of report, because it would give credence to the outfit.
But when Domino's reported, it blew away the quarter. Domestic retail sales growth, which had been predicted by MScience to be 2.5%-3.5% below consensus estimates of 14.6%, came in at 13.4% -- a very strong number. Those who sold at $175, either because they had no idea what was going on and got shaken out, or were acting on the MScience report, missed the twenty-point gallop to all-time highs. Not only was the quarter not disappointing, it was probably the biggest upside surprise of the group.
Now, I know from speaking with people at Domino's that some of their stores were getting calls from people asking how business was. There were store owners being queried as part of a survey of how business was. Domino's had no idea who was making the calls.
But it's pretty clear in the case of MScience that whatever research it was doing produced the wrong result.
Regardless, every firm has the right to make big calls about how a company may or may not be doing, and for all we know these are the only two that MScience got wrong. But you do have to wonder what the M stands for after these two incidences.