Capturing Alpha: Scouring Social Media To Gain An Edge
Company news posted via social media can precede press releases. Social media can be used as a tool to establish company relationships. In rare cases, it can even provide tools for uncovering hard financial data. Gaining an edge in the market is hard, especially for an individual investor. There are people making good money and working long hours analyzing economic data and crunching numbers based off of 10ks , so how are you supposed to compete? Maybe by looking at different information altogether. For small and micro cap companies, it seems that more and more opportunities are presenting themselves via social media. This medium can break news that might never show up in a PR, yet it may fall outside the scope of the professionals. I observed this phenomena first hand with a holding in Digimarc (NASDAQ: DMRC ), a tech company looking to partner with major retailers. One Monday, the CEO of Walmart, Doug McMillon, posted a picture to his Instagram account acknowledging that the company was experimenting with Digimarc technology. At the time, the account didn’t even have one thousand followers, and Digimarc wasn’t mentioned directly in the posting. For these reasons, people paying attention found themselves with a great opportunity. Instead of blasting off, the stock seemed to climb as the news spread, eventually peaking at $49 (click to enlarge) Ultimately, events like those will probably be exceedingly rare. There has to be a small company, involved with a large company, where information comes from a verifiable source with a small following. With a little more legwork though, there are still opportunities to uncover information that may be significant to company developments. What follows are two examples of the type of this type of research. The first deals with determining relationships, while the second is the holy grail of this sort of research and yields hard data on company financials. The first instance involves Digimarc again. The company held an online seminar where they explained the capabilities of their technology and took technical questions from potential users of their products. In the chat box, many participants identified themselves and the city from which they were logging in. The benefit of having this information is that the names could then be cross referenced against LinkedIn profiles to get a sense of potential customers for Digimarc. Included in the chat were the following people. Person Company Notes Jeff Rosenzweig Zaptivity Managing Director Klaudia Campos Peel Plastic Products “For over 30 years, Peel Plastics Products Ltd. has been a recognized leader in flexible packaging solutions and process innovation.” Brian Novotny Schwan Food Company Represents lots of brands besides Schwan’s® including Red Baron® , Tony’s® , Freschetta® , Pagoda® , Edwards® , Mrs. Smith’s® Shasta Blaustein Dollar Shave Club Bill Belias Ergonix Company President Ultimately, this information is neat, but it is neither breaking news nor hard data. Digimarc has said that it is basically in discussions with everyone in the industry, and discussions aren’t dollars. Still, that this type of information can be gleaned at all is something to constantly be thinking about. What if this had been a smaller company and the chat had been full of people working for FritoLay? If you turn over enough stones, eventually you’ll find something. The grail of any analysis goes beyond uncovering relationships and into ferreting out actual revenues and expenses. These opportunities are rare, but I came upon one recently. Wizard World ( OTCQB:WIZD ), an events company that holds comic cons all over the country, has recently begun attempting to diversify its revenue stream. One of its new products is the Comic Con Box. A thirty dollar subscription service similar to Birch Box, but which delivers nerdy t-shirts and toys to people on a monthly basis. Massive competitors in the space exist, most notably LootCrate, but Wizard World’s celebrity and artist relationships as well as its brick and mortar conventions give it advantages which could allow it to catch up and emerge as a contender. At the LD Micro Conference in June, CEO John Macaluso mentioned that some day in the distant future the box business could be the company’s leading revenue generator. Since the company’s comic cons are generating more than twenty million dollars annually, this certainly made it sound like early results were promising. The most recently released quarter, however, only captured a fleeting look at Comic Con Box data. Its figures comprised the initial small launch plus one month. Investors following the company were informed that the company had made $132 thousand on sales of the Comic Con Box. A slightly deeper dive into the 10Q, however, showed that the unearned revenue from the sale of future boxes was $124 thousand. Regarding what goes into that number, Wizard World states that, “Unearned ConBox revenue is non-refundable up-front payments for services. These payments are initially deferred and subsequently recognized over the subscription period, typically three months, and upon shipment of the product.” In other words, the $124 thousand represented essentially all July sales plus the remainder of funds garnered from long term subscriptions. Single month recurring subscriptions were not included nor were, obviously, purchases from new buyers occurring after the period closed. At the time three months was the longest possible subscription so it was a guarantee that all of that $124 thousand would be recognized during the next quarter. Additionally, the bottom line prospects were good a well as the p ress release for second quarter results states, “We are now planning to ramp up the volume of boxes shipped monthly, and anticipate this recurring, higher margin revenue stream to continue to grow.” Growth was clearly ramping, and every single box was selling out, but how much was Wizard World increasing the supply by each month? If there was a way to acquire early data points a person could hold a major advantage. At $30 a box, if they had grown to 5,000 units by the end of the quarter, that would represent an annualized figure of close to two million and growing fast. Then I saw this photo posted to Instagram. A celebrity had signed 1,200 items to be placed in future boxes. This certainly wasn’t going to be enough for everyone to get one based solely on the initial revenue figures, but it created a chance for analysis. All that had to be known was whether the 1,200 would be distributed in a single box or across several and the rate at which they were distributed. Luckily, a later post confirmed that the 1,200 would be placed during a single months mailing. From there, all that was left was to determine the percentage of boxes that held the autograph. Uncovering this figure was tedious, but in no way actually difficult. The key to figuring things out was that Comic Con Box encourages people to post videos to YouTube of themselves reacting in real time to the items they’ve received. Watch enough of these, and you have a random sample. (I actually believe that, including prior months where I was simply watching to see people’s reviews of the items, I most likely have watched more of these than anyone else in the world) It’s the same as sneaking into the Comic Con Box warehouse, opening a bunch of boxes, and extrapolating data directly. The only thing to be careful about is that the boxes are truly unopened. Anyone posting a review with the box already open is biased by its content: They may only be posting to show off their autographed memorabilia. The results were as follows: Videos 56 Autographs 22 Percentage 39.29% Projected Boxes Sold 3055 Monthly Revenue $91,636.36 Annualized Revenue $1,099,636.36 Elements that could have skewed that data were if people were more likely to post their videos if they received the autograph (or more likely to post them sooner as I went with the very first uploads) or if this was a particularly popular or unpopular box. It did get supported by a DC Comics tweet which is an account with around a million and a half followers. Ultimately, the fact that around three thousand people received the most recent Comic Con Box isn’t terribly actionable information. It’s slightly below my expectations, but since boxes are selling out this is more a sign of cautious management rather than limited demand. Additionally, this is the sort of exercise that it is useful to make a habit. The idea isn’t that you will be able to make great investments off of every social media investigation. It’s that, as the Digimarc-Walmart event proved, the opportunities are out there, and if you don’t put in this sort of work, you’re guaranteeing you’ll miss out. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long DMRC, WIZD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.