NexGen Tone Analytics: Short AKAM Call

Akamai To Hold Third Quarter 2017 Investor Conference Call On Tuesday, October 24th At 4:30 pm ET

Recommend short AKAM going into the call based on analysis of the earnings call analytics of previous calls and the price movement in the days following.

Using our Earnings Call Tracker I uncovered a pattern of performance that resulted in my recommendation of a short trading strategy around the earnings call in a few weeks. This process was limited to the earnings call analytics summarized below as an investor should complete an analysis of the company, market and macro factors. The next step would be figure out what's missing that could explain the the data. Whether a short going into the AKAM call makes sense or not, it is certainly not a stock I'd be holding right now.

How can the detailed analysis of earnings call texts using Boulder's Earnings Call Tracker help you make trading decisions? For the answer, I'll take you the 5 Step Process I used for AKAM. Before this analysis, I knew of Akamai but had never read a filing, invested or followed the company. Neither Boulder Equity Analytics or I own shares in AKAM.

In this case AKAM was picked for this post using the BECT Heat Map to screen for opportunities in the S&P 500 Tech Sector.

Step One - Use the Heat Map to Screen for Candidates

Starting with the Call Net Tone Overview I looked for a company that was trending negative with neutral to negative Q&A tone scores and companies that had high numbers of questions and answers. These are not definitive indicators by themselves but studies have shown them to be useful to identification of future financial and share price declines.

The first company that fit was AKAM, though the last quarter looked like it may have turned around. Since average tone scores are only an indication, I decided to take a quick look at the themes and tone analytics from the most recent call.

Step Two: Check Call Theme and Topic Clouds

Since I don't know the company, I started with Analyst Themes to see what the analysts are asking Akamai. There was nothing in the topics that stood out for the last four calls (below). This is one of several views where we look at both question and answer topics. Good management answers will match the questions. Significant differences and negative tone (red) indicate management may be trying to redirect the conversation.

Step Three - Check Call Summary, Intro and Order Tone Detail

The real power of BECT is the ability to look past sentiment/tone average scores and take apart the calls to find the signals you would be listening for. First is a Call Tone Summary view that provides overall tone, average question and answer tone, separate scores for the management intro remarks, tone for the top ten topics and some breakdown for each analyst.

For AKAM this looked pretty good for the most recent call, both in tone and the match between questions and answers. Next up is the Call Intro Tone which scores the management intro.

Here the Similarity score was good, indicating the call introductory remarks are similar quarter to quarter and the management team is disciplined and stable. The flag here was the overall uncertainty tone and at the paragraph level, a significant number of negative uncertainty, litigious and constraining scores. Next and without taking the time to listen to the call I used the Call Order Tone view to get a feel for the give and take with analysts.

There is a lot of information packed into this visualization. It was't a good pattern due to the number of significant negative questions by multiple analysts, especially at the end of the call. I decided a quick look into the share price might explain analyst tone and why some of management's answers were negative.

Step Four - Check Stock Price, Estimate, Financial and Recommendation History

Below I've included the one-year price chart and several graphs from Yahoo Finance to get some context. The objective in this step is to determine whether obvious factors related to company financial, market or macro factors would preventing us from isolating moves caused by the earnings calls.

There was clearly a significant price drop with high volume at the time of each of the last three earnings calls. After each price drop, it stayed at that level and didn't rebound, though it rose slightly going into the following call each time.

Note that it is following the same pattern again and while earnings estimates have been lowered it still looks setup for another step down.

These price drops cannot be explained by an earnings miss, though expectations are coming down each quarter. The graph below shows the company's revenue growth is flat and clearly AKAM has an earnings problem. So I'm beginning to understand the price chart, but..

Given the lack of downgrades by analysts in the face of the company's performance, are they holding up the price between quarters? For 2017 I don't need sophisticated comparatives to know the market and the sector is doing much much better than AKAM, if anything the market may be lifting the price.

Step Five - Call Analytics History and Analyst Due Diligence

For a deeper look at the analysts, I went back to the BECT analytics to see how management and the analysts interacted on the previous earnings calls. The Call Order Tone charts showed progressive deterioration with only a slight improvement in the last call.

The Analyst Coverage view for AKAM provides confirmation of the predominately negative but lack of consensus among analysts. Easy to read: less blue, more red left to right. Click on any element and I can read the text from the call.

Analyst Coverage with Tone - Last 4 Quarters

Conclusion

Using BECT in less than 30 minutes I uncovered a pattern of performance that pointed to a possible profitable trading strategy on a stock I knew nothing about. Since I didn't spend four hours listening to the calls to get to this point, I saved time. Additionally, the visuals help overcome the recency bias that hampers our ability to see trends in data that stretch across quarters/years of information.

For AKAM, my next step would be to invest time researching the company to figure out what's missing that could explain the above data. Whether a short going into the AKAM call makes sense or not, it is certainly not a stock I'd be holding right now.

BECT Tech Sector, Consumer Staples, Consumer Discretionary and Energy are available now and the season is starting. For more on the research behind the value of sentiment for earnings call analysis, see our earlier post.

Tom

#research #investing #textanalytics #finance #linguistics #fintech

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