Legendary investor Warren Buffett advises to be fearful when others are greedy, and be greedy when others are fearful. For as Anatole France noted, "If fifty million people say a foolish thing, it is still a foolish thing." Then again, they could be right.

One way to hedge the risk of betting with the wrong team is to separate the people into those who may know more, and those who don't. The Steel City Reputational Value Metrics have established a good track record of flushing out the know-nothings, as evidence by the long-term returns of RepuStars, the reputation-linked index calculated by S&P/Dow Jones Indices (Ticker:REPUVAR).

Apple, Inc. (AAPL) is a great case in point. As a result of shareholder activity, equity value has plummeted. But do equity investors really know what is going on, or are they doing a foolish thing? The key summary measures based on the Steel City Re metrics and calculated by Consensiv, reputation value quality and reputation value independence, suggest that the non-investor stakeholders are confident in their expectations of the firm.


The more detailed metrics from Steel City Re give insight into those expectations. The company's reputation rank (CRR) relative to its peers in the 22-member computer processing and hardware sector is at the 95th percentile. The volatility of it reputational value metric, RVM, a non-financial measure of reputational value, is at the opposite end of the spectrum at the 5th percentile with a current value of under .5%. The company's stakeholders are exceedingly confidendent that there is a great deal of reputational value in this company. By a variety of other measures of the company's economic performance relative to its reputational metrics, it is -- as they say on Wall Street -- heavily oversold. Ah, but the year is only 30% through, and by the same metrics that indicate Apple's upside, the S&P500 is probably in a bubble. Stay tuned.

These are interesting times for Dell and its diversity of stakeholders as three different groups fight to take control back from the public. The founder, Michael Dell, is offering $13.65. He's the ultimate insider with the best information, and low balling the value was a great strategy when he was the only game in town. Enter Blackstone at $14.25 and Carl Icahn at around $15.

The Steel City Re reputational metrics provide an interesting angle to this story. For one thing, all this attention was bound to drive up the CRR, a measure of relative reputational ranking, to the 76th percentile whereas only weeks ago, it was in the lowest quartile. Sudden movements of this magnitude are reflected the the Current RVM volatility which is approaching 8% -- a value of concern in that 7% is the threshold above which the relative risk of a major loss in market capitalization exceeds 1.0. Return on equity is now almost at the median for the 22-member computer processing hardware sector -- odds are now against that value remaining that high for long.

While Apple (AAPL) has given its shareholders, and more broadly its stakeholders, an exhilarating roller coaster ride,  Microsoft (MSFT) has been plodding along. Its not exciting anyone. Its not really disappointing anyone. Its just lumbering along. Which is great for a utility or an oil company or even a giant pharmaceutical, but its not the sort of thing technology companies are supposed to do.

Jonathan Salem Baskin, who moderates the Society's Mission Intangible Monthly Briefing, wrote this week in Forbes magazine, "Can Microsoft maintain its holding pattern going forward? Again, there’s no crime in being consistently unremarkable, and Microsoft makes money hand over fist. But its reputation — the intangible value it gets from its stakeholders — seems stuck in the mud. And if there’s one thing I’ve learned over the years, it’s that reputations aren’t static, they’re earned anew every day. Performing down to expectations isn’t a value-add strategy, and it leaves open the room for other businesses to grab the reputation high ground, or market conditions to ultimately pass you by."

The Steel City Re Reputational Value Metrics, described further in the book, Reputation, Stock Price and You, are measures of reputational value and ranking. The former is represented by the RVM and is expressed in Gerken Units; the latter is expressed in percentile units. To Mr. Baskin's point, the one-year historical RVM volatility is only in the 10th percentile of the peer group, and while the current RVM volatility is above the group median, the company's ranking, the CRR, has actually drifted downward slightly over the trailing twelve months from aroun the 77th percentile to the 72nd percentile. On the bright side, indicators of change show expectations of some transition with a greater than even probability. Still, given that this was a year Microsoft was expected to "wow" the market, the silence associated with the company's reputational volatility is deafening.

Apple Inc. is a firm that has sought to communicate a singular message through every channel. Whether the message was sent by the marketing department, investor relations, or the product team, the content was the same: Apple is an innovative company producing the coolest products on the plan.

It so happens that even with such clarity, stakeholders can get confused when it comes down to the details. Consider this post, a few weeks ago, labeled "contrarian." (1) Tim Cook is an innovator on the supply-chain side despite his stuffy reputation, (2) Apple Inc. (NASDAQ:AAPL) has the potential to "become a massive mobile-payment provider," (3) it still has the "best selection of apps of any mobile operating system," and most notably, (4) it predicts that "Apple’s sales in China are only beginning their upward arc."

Now fast forward to this week's shareholder meeting where investors are battling over Apple's use of cash and are expressing their unhappiness with executive compensation plans. The company is under pressure to return more of its cash hoard to investors after David Einhorn’s Greenlight Capital Inc. persuaded a judge to block a vote on whether to limit creation of preferred shares. According to Bloomberg, "Einhorn has used the lawsuit to drum up support among fellow investors to get Apple to return some of its $137.1 billion in cash and investments back to shareholders. The push comes as Apple’s stock has declined 36 percent from a record in September on concern that growth is slowing." The Financial Times reported that "at least a third of Apple’s shareholders have declined to back the company’s executive pay at its annual meeting, after chief executive Tim Cook was given a 51 per cent increase in his basic salary last year and other members of the management team were given big equity awards."

Wait. There's a contrarian view. Calpers, the largest US pension fund, disagrees with Einhorn. According the the Financial Times, Anne Simpson, head of corporate governance for Calpers, said that shareholder support for Apple’s proposed changes reflected a fundamental difference in approach between activists and long term shareholders. “Do you throw a brick through the window, or do you walk smartly up to the front door and ring the doorbell?” One of Einhorn's own investors took issue, too. In a letter to the founder of Greenlight Capital, the Nathan Cummings Foundation said: “By threatening to disenfranchise Apple shareholders, Greenlight Capital has acted in a manner that is not consistent with our understanding of Greenlight Capital’s own orientation and investment philosophy.”

There is ample anecdotal evidence that Apple's stakeholders are confused. What say the measures of reputation, which are nothing more than an indication of the economic consequences of stakeholder expectations. As provided by Steel City Re, the measures show, well, confusion.  Call it lack of consensus. RVM is a non-financial measure of reputational value, and its volatility is an indicator of alignment. Apple's current RVM volatility is up from the 33rd percentile among its peer group, its historical value, to the 48th percentile with recent spikes as high as 8% after running lows of sub 2%.  Stakeholders are surprised. They're not used to dealing with an unclear picture from Apple, and the cost of that confusion is the equity investors are fleeing.  In local parlance, Apple's reputational value premium, while still at the 86th percentile of its peer group, is no longer at the 100th percentile. The company is losing reputational value, which, as described in great detail in Reputation, Stock Price, and You, rarely goes unnoticed.

Dell's endgame is nigh. The innovative business model that produced high quality low cost computers, and a service package to boot, has been overcome by events. Others are making computers better, faster and cheaper even as the market for PC's is being eroded by more powerful mobile solutions and remote storage.

Jonathan Salem Baskin, moderator of the Society's Mission Intangible Monthly Briefings, writes this for Forbes magazine (Jan 26):

Dell has suffered and languished for years. We all watched the long, slow slog, and at numerous points along the way the leaders of the business could have realized that things weren’t just ‘tough this quarter’ but ‘evidence of a deeper ill,’ and then done something about it. The company didn’t teleport to this point in time. I wonder if Dell failed to understand its reputation — the ongoing narrative of business performance, which has a closer connection to things like operating costs, profit margins, and how those qualities are valued by external stakeholders — and therefore missed its obligation to manage it? If so, it’s not fixable with marketing or financial legerdemain.

The reputational value metrics provided by Steel City Re affirm the above in stark quantitative terms. The company's reputational value vital signs, top left bar chart, show below median measures with decreasing volatility, a depressed CRR (measure of relative rank) at the 14th percentile, below median ROE, and an indication of expected change that is only a further exacerbation of ongoing negative trends. RVM (a measure of reputational value) volatility no longer follows sector or market concerns. The company's reputation is now wholly driven by expectations concerning its viability, not its profitability or renewed market engagement. The metrics are those of a company whose business model has evaporated - a failure of strategy at the highest managerial levels.

As you recall, HP announced last Tuesday losses tied to alleged fraud at Autonomy. Huygens opined that Steel City Re’s Reputational Value Metrics prior to Hewlett-Packard’s announcement of the $8.8 billion charge indicated that stakeholders were immune to further surprise. That interpretation was good, but not good enough.

Last week, HPQ’s reputational ranking was at the 33rd percentile and its forecast stability was the highest among 22 peers. That's a poor showing for what was once the icon of Silicon Valley, but its been a bad year. After all, in addition to the boardroom personnel shenanigans, H-P this past August took an $8 billion writedown on the 2008 EDS acquisition representing more than half the $14 billion purchase price. Likewise, H-P is believed to have written down most if not all of the value of its 2010 acquisition of Palm for $1.2 billion.

Back in September, the Motley Fool explained why HP’s reputation—based on expectations of innovation--was on a downward spiral.

-Lack of invention/innovation: Well we can say that HP has not lived up to its tag line-invent. HPQ has filed 1 patent a week on an average last year as compared to 44 filed by International Business Machines (NYSE: IBM) and 88 filed by Samsung…(I)f patent filing is taken as a sign of innovation power for the company, then HPQ has miles to travel before it is in par with its competitors.
-Lack of competing factor: The last CEO of the company Leo Apotheker made an announcement in the public which led to a huge negative impact on its business.… In such a situation instead of taking a hasty decision of separating the PC business from its umbrella brand, HPQ should have worked more on how to improve its operating margin and bring down its overhead costs in this segment.
-Technological Pace: HPQ - the pioneer of the mobile device, is … unable to keep up the momentum in the mobility space. HPQ launched its Touchpad in July 2011 – a ray of hope. But as a shock to many, they removed the Touchpad within 45 days itself - reflecting non competence in this arena.
-Over reliance on webOS: WebOS lacked that appeal to the consumer sector…and which caused the failure of its Touchpad.

And then there were the governance matters:

-Fragile / Inconsistent top management: One of the signs that the company is going down the drain is when we see that the top management is fragile or changing regularly. This is quite visible in HPQ where the CEOs have changed many a times with the likes of Carly Fiorina, Mark Hurd, Leo Apotheker and now Meg Whitman.
-Maligning its own reputation: HPQ is quite famous in the imaging and printing group – one of its major sources of earnings. HPQ was busted a few months back for putting less and less ink into its Printer cartridges. … In their attempt to earn pennies they lost the trust factor of many of their precious loyal customers.

With the latest metrics now available, Huygens interpretation of last week's numbers was only partly right. The vital signs (top right graph, below) show rock-bottom historical volatility of RV, a non-financial measure of reputational value, meaning, as The Fool explained, every stakeholder had good reasons to not expect much from HP. Current volatility, however, has jumped from the 10th percentile to the 52nd percentile, meaning, HPQ is now "average" among firms in this highly risky technology sector. It could have been a greater shock, but, as the metric show, it simply wasn't. The RVM volatility time series, (top left graph, below), shows last week's spike raising current volatility to a level only slightly above the median for the whole sector. HPQ's CRR, a measure of relative reputational ranking, dropped over the week from the 33rd percentile to the 10th percentile. ROE remained at bottom, and the forecast stability dropped from 1.0--the most stable--to the the 29th percentile and clearly not the worst in this sector. Forward looking measures, (right column, bottom two rows) are signalling further reputational value deterioration. (For a deeper understanding of the metrics, read: Reputation Stock Price and You: Why the market rewards some companies and punishes others).

Yes, when everyone expects you to fall, it's hard to elicit any startle responses. It is even harder to surprise anyone with a fall when you are already on the floor. And yet, mathematicians have long suggested that there must be some practical application for imaginary numbers. Now, Pippin?

 
 

It's hard to believe that more than a year has passed since Huygens last visited HPQ and opined that, based on the metrics, the board appeared dysfunctional. Yet in under thirteen months, HPQ has fulfilled expectations of underperformance and driven a once-fabulous company to the lowest rankings among 22 peers in the computer hardware processing sector. Tim Travis, writing for Seeking Alpha, put it this way:

The noise in the quarter was the result of a non-cash charge for the impairment of goodwill and intangible assets primarily relating from the Autonomy acquisition, which in my estimation can be firmly placed in the Mount Rushmore of disastrous acquisitions. The write down was no surprise to us as the day it was announced we were in disbelief that a CEO and Board of Directors could be so naïve about destroying shareholder value.

As to the metrics, the RVM measure of Steel City Re's reputational value metrics showed a consistently low level of volatility for the entire past year -- in English, all stakeholders were in agreement that the reputation was appropriately slowly drifting downward (just as Travis said). The metrics were scraping rock bottom. RVM vol was as low as they go among peers; current RVM vol was at the 10th percentile foretelling increasing uncertainty. CRR rank at the 33rd percentile (and sinking), ROE at rock bottom among peers, and forecast stability at the highest levels (it is hard to fall when you are near the bottom.) Collectively, all of these suggest that for the past year, all stakeholders have been anticipating the additional bad news finally announced end-of-day Monday 19 Nov.

In the race for distinction by dysfunction, scoring an own-goal is helpful. But from time to time, it does not hurt to have an assist. We're referring, of course, to the lack of love between Oracle and Hewlett Packard. Here's the latest installment, a press release from Oracle 28 September, reproduced without edits or comments.

"After HP agreed to acquire Autonomy for over $11.7 billion dollars, Oracle commented that Autonomy had been ‘shopped’ to Oracle as well, but Oracle wasn’t interested because the price was way too high. Mike Lynch, Autonomy CEO, then publically denied that his company had been shopped to Oracle. Specifically, Mr. Lynch said, “If some bank happened to come with us on a list, that is nothing to do with us.” Mr. Lynch then accused of Oracle of being ‘inaccurate’. Either Mr. Lynch has a very poor memory or he’s lying. ‘Some bank’ did not just happen to come to Oracle with Autonomy ‘on a list.’ The truth is that Mr. Lynch came to Oracle, along with his investment banker, Frank Quattrone, and met with Oracle’s head of M&A, Douglas Kehring and Oracle President Mark Hurd at 11 am on April 1, 2011. After listening to Mr. Lynch’s PowerPoint slide sales pitch to sell Autonomy to Oracle, Mr. Kehring and Mr. Hurd told Mr. Lynch that with a current market value of $6 billion, Autonomy was already extremely over-priced. The Lynch shopping visit to Oracle is easy to verify. We still have his PowerPoint slides.”

The latest reputation numbers from Steel City Re show no material change from last week, if you consider another 4% relative under performance immaterial. The alleged overpayment by HP for Autonomy by nearly $6B is impressing no one that hasn't already formed an opinion on Hewlett Packard's (NYSE:HPQ) reputation. At the close of trading 29 September, HP was ranked in the 47th percentile relative to the 17 companies in the Computer Processing Hardware sector. This is up a notch from the 41st percentile last week. Its exponentially weighted reputational ranking volatility is up from last week's 460% to 512%, while both the reputational vector and velocity are negative at 19.6% and 41% respectively compared to -15% and -46% last week, respectively.


 Economically, the performance is poor with a trailing twelve month return on equity that is under performing the median of the peer group by 33.05% down approximately 4% from last week's 29.28% under performance leading us to affirm that the expectations set by a board -- its reputation -- are material.

Leo Apothekar is out and Meg Whitman is in as Yahoo! and HP continue their odd competition for the most interesting performance by a governing board this past decade. Here's a quick recap of HP's ongoing  saga, courtesy of The Economist (22 Sep): "Whatever happens, the saga is another blow for a company that has lurched from one boardroom crisis to another. Mr Apotheker took the wheel at HP in November 2010 following the departure of Mark Hurd, who left abruptly amid stories of sexual indiscretions and problematic expense-reporting. Mr Hurd had taken over from Carly Fiorina, who was binned in 2005 after the firm’s profits plunged. A year later Patricia Dunn, HP’s then chairman, also departed after a scandal involving an investigation into suspected press leaks from HP directors."

This Board-level soap opera has left its mark.This week, HP ranked in the 41st percentile among the 17 companies comprising the Computer Processing Hardware sector. This ranking represents a 35 percentile drop from a ranking of 76 twelve months ago. Its exponentially weighted reputational ranking volatility is hovering around 460% while both the reputational vector and velocity are negative at 15% and 46% respectively.

Over the past few weeks, the median reputational metric of the Computer Processing Hardware sector has been stable at a relative ranking of 40%.  Meanwhile, the intangible asset fraction of the company continues to climb to more than 110% suggesting either major book asset write downs or additional leverage. The median for the sector is around 80%.

Economically, the performance is poor with a trailing twelve month return on equity that is underperforming the median of the peer group by 29.28% leading us to conclude that the expectations set by a board -- its reputation -- are material.

On Monday 14 February, Barron’s released its list of the world’s most respected companies. Apple (NASDAQ:APPL) tops the list at #1 yet again. And lest your curiosity be left hanging, finishing off the top 5 are Amazon (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRK), IBM (NYSE:IBM) and McDonald’s (NYSE:MCD).

And then there is Nokia (NYSE:NOK), the world’s biggest telephone handset-maker. Quotes the Economist, “We are standing on a burning [oil] platform,” Nokia’s CEO, Stephen Elop, wrote in a memo to all 132,000 employees. If Nokia did not want to be consumed by the flames, it had no choice but to plunge into the “icy waters” below. In plainer words, the company had to innovate -- quickly.

The value of Apple’s reputation for innovation, earned by actually being innovative, is that while the most respected company in the world only commands 4% of the telephone handset market, it commands 50% of the profits. That's pricing power, a benefit of a superior reputation, in the extreme.

Turning to the reputation metrics, Apple’s popular standing is reflected in its stable top ranking in the Steel City Re Corporate Reputation Index. Over the trailing twelve months, it has made the jump from the 97th percentile to the 100th percentile among the 51 companies in the Electronic Data Processing Equipment sector, and over the past six months, it hasn’t budged from that spot. Its corresponding trailing twelve month return on equity is 58.63% greater than the median of its peer group, its EWMA volatility is 1%, its trailing twelve week reputation velocity is 0.0, and its trailing twelve week reputation vector is undefined.

Its peer group shows a U-shaped drop and recovery in reputation standing relative to the market as a whole, and the intra-sector volatility is at the upper end of average. Significantly, the intangible asset fraction of the group has been progressively rising these past 12 months.

Nokia should wish for such metrics. Over the trailing twelve months, it has dropped from the 36th percentile to the 19th percentile among the 30 companies in the Diversified Electronics sector. Its corresponding trailing twelve month return on equity is 52.22% below than the median of its peer group, its EWMA volatility is 2%, its trailing twelve week reputation velocity is -10%, and its trailing twelve week reputation vector is -.8% which is a material level.

Its peer group shows a slight rise is reputation standing relative to the market as a whole, and the intra-sector volatility is at the low end of average. Last, its intangible asset fraction has dropped from 86% to 78% of market capitalization while the median of its peer group now stands at 88% of market cap.

Mr. Elop believes that one advantage Apple has over Nokia that he believes he can overcome is its access to the innovative genius that is resident in Silicon Valley. Stay tuned, as Finland comes to California.