How to Beat DEI and ESG: Companies to Short and Profit from the 'Go Woke, Go Broke' Trend
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The corporate governance world is undergoing a disturbing change. Diversity, equity, and inclusion are constructs that are being pushed to the very top of the corporate agenda. At the same time, supposedly 'green' (i.e., environmentally friendly) concerns have been rapidly relegated to a more obscure part of the agenda. There is thus an increasing insistence that companies, and the colleges and universities that educate corporate leaders, first and foremost, must reckon with DEI as a top priority. Not leaving any stone unturned, the new insistence is also influencing corporate governance not just as a matter of who gets to rule over what (the usual description of governance), but as also having everything to do with how the rulers over business accomplish their agenda of reconstituting the societies in which we all live.
Powerful organizations, such as BlackRock—under the direction of its CEO, Larry Fink—and think-tanks such as the World Economic Forum (WEF), are the driving forces behind this incursion. They are putting intense pressure on corporations to join what they call the stakeholder capitalism bandwagon and to adopt as their own the ESG and DEI tenets that these organizations hold dear. BlackRock and the WEF may be the most influential advocates of this new business order, but they are by no means the only ones.
"Go Woke, Go Broke" has become a catchphrase among conservatives as a narrative to explain perceived failures of the "woke" new corporate paradigm. But what we term "woke capitalism" has some pretty dim-witted aspects. For one, it seems seldom to have much of a point. And when it does, the point often seems to be undermined by some kind of corporate sleight of hand. Yet the whole phenomenon raises a question that's worth pondering: Why have some large corporations gone so far out of their way to look as if they think they care?
When social initiatives come at the cost of company profits, they can threaten the very survival of these businesses. This work tries to uncover the convoluted and frequently harmful bond between corporate social initiatives and financial performance. In elucidating what we see as the "Go Woke, Go Broke" phenomenon, we try to arm investors with a clearer understanding of the dangers tied to today's fixation on ESG and DEI. We think it's high time to ask whether the agenda being pushed by BlackRock, and other heavy hitters really does serve the best interests of businesses, their shareholders, and society as a whole. Our view rightly argues that an overemphasis on DEI and ESG can lead companies to bloat their workforce with unnecessary departments and divert precious resources to dubious programs.
Identifying Vulnerable Companies
The corporate landscape is increasingly dotted with companies that have deeply entrenched themselves in DEI and ESG initiatives, often at the expense of financial performance. Sectors like consumer goods, technology, and finance are particularly susceptible, where virtue signaling has become a corporate addiction. Many companies, under pressure from the aforementioned influential entities, have pivoted towards aggressive DEI policies and ESG goals. However, this shift often prioritizes activist shareholders and social justice narratives over profitability, risking consumer backlash and financial ruin.
The cautionary tale of Bud Light illustrates this peril. Their partnership with a transgender influencer, intended to appear progressive, backfired spectacularly, leading to a boycott, plummeting sales, and significant market value erosion. This incident underscores the risks of prioritizing DEI over understanding one's core customer base. Tech giants like Google and Facebook, in their pursuit of diversity, have implemented policies that prioritize identity politics over merit, potentially compromising innovation and alienating talent. Google has especially “nerfed” their products as a result. Is there anyone out there that thinks Google search is better than it was 10 years ago? A study claims to purport that is because of "SEO spam" but I suspect it's more of a consequence of a combination of poor choices in hiring and taking it upon themselves to censor the internet. The writing had been on the wall since 2017 when they fired Blake Lemoine for his rational and well constructed 10-page "Anti-Diversity Manifesto".
In finance, banks and investment firms embracing ESG might be neglecting sound financial principles for arbitrary ESG metrics, risking underperformance and breaching fiduciary duties. Retail isn't immune; Target's controversial merchandising decisions alienated customers, showing how misreading consumer sentiment on social issues can lead to financial repercussions. Even traditionally conservative sectors like energy face risks. Companies transitioning hastily to renewables under ESG pressures might undermine their long-term viability and energy security.
Investors should scrutinize not just financials but how companies balance DEI and ESG with core business objectives, as over commitment to these trends can lead to vulnerability. We would like to highlight the importance of understanding corporate commitments beyond financial statements, focusing on how these initiatives might detract from a company's primary purpose: delivering value to customers and returns to shareholders.
Analyzing Market Sentiment
In today's hyper-connected world, market sentiment can shift rapidly, with companies prioritizing social agendas over profitability often facing backlash. Social media platforms like X (formerly Twitter) have become battlegrounds where consumer and investor sentiments are not just shared but weaponized.
The influence of these platforms on market perceptions is immense. A viral post or tweet from an influential figure can spark a cascade of negative sentiment, swiftly impacting stock values. This dynamic has birthed a new form of market activism, where users discuss and coordinate shorting companies based on their DEI and ESG commitments. We seen this strategy have success this month in relation to Harley-Davidson, when commentator Robby Starbuck pressured them to hit the brakes on DEI.
My full breakdown of @harleydavidson’s new response to our boycott where they announce an end to woke trainings, no more participating in HRC’s far left social credit CEI scoring, a return to sane donations and no more DEI. It’s time for a victory lap and what comes next. 🔥🔥🔥 pic.twitter.com/dVA5KoYfjo
— Robby Starbuck (@robbystarbuck) August 19, 2024
These online discussions highlight the financial risks of woke corporate strategies. Investors are increasingly wary of companies yielding to pressures from BlackRock, the WEF, and other ESG advocates, recognizing this as a potential vulnerability.
Consider Disney's case, where a public dispute over Florida's educational legislation led to significant social media backlash, affecting their business and stock price as investors questioned their strategy. Similarly, Gillette's campaign on "toxic masculinity" faced immediate criticism, translating into consumer boycotts and investor concerns.
This isn't confined to consumer brands; B2B companies like Salesforce or Microsoft also face scrutiny for prioritizing DEI or ESG over core business, risking client and investor trust.
The digital age's rapid sentiment shifts underscore the need for companies to focus on core business rather than chasing woke approval, highlighting the volatile interplay between corporate social commitments and market reactions.
Shorting Strategies
For savvy investors seeking to capitalize on the "Go Woke, Go Broke" phenomenon, shorting overextended companies presents a potentially lucrative opportunity. The key lies in identifying corporations that have made significant DEI and ESG commitments while simultaneously showing signs of financial strain or facing negative market sentiment.
To effectively target these vulnerable companies, investors should look for several key indicators:
Declining Sales: Watch for companies where sales figures are dropping, indicating their social initiatives might be alienating customers.
Negative Media Coverage: Focus on firms receiving backlash for their DEI or ESG efforts, as this often precedes financial trouble.
Investor Confidence: Look for signs where major investors might be pulling out, signaling a lack of faith in the company's direction.
Excessive Spending: Companies spending heavily on non-core DEI or ESG activities might be neglecting their profitability.
Misaligned Values: When a company's ideological push conflicts with its customer base's values, it's often a red flag.
Technical analysis is your friend here.
Look for:
Bearish Patterns: Chart patterns indicating potential price drops.
Moving Averages: Declining averages can signal weakening stock health.
Volume: Increased selling volume on down days can confirm bearish trends.
Timing is everything. Shorting too early or too late can lead to losses. You need to catch the wave of market disillusionment with these companies at the right moment. Many of these stocks might be overvalued due to past ESG hype. As investors start to see through this, there's potential for significant corrections.
Risks and Mitigation:
Unlimited Losses: Short selling can lead to unlimited losses if the stock price rises.
Market Volatility: Government actions or sudden shifts can spike stock prices unexpectedly.
Position Management: Use stop-loss orders, diversify your shorts, and be ready to exit quickly if the trade goes against you.
Shorting requires not just a keen eye for market trends but also a strong risk management strategy. It's about balancing the potential for profit with the very real risks involved. Always ensure you're well-informed and prepared for the volatility that comes with betting against the market's darlings.
Case Studies
The business world is rife with examples of companies that have abandoned their fundamental competencies and shareholder value for the sake of social ideologies; Boeing is the most glaring and disturbing among them--a company that was once the pride of American engineering is now teaching us the dangers of ESG and DEI.
Boeing's recent problems began when it decided to implement diversity quotas and ESG metrics as the company's top priorities, thus downplaying engineering and safety. In other words, the company's management, obviously more concerned with BlackRock and activist investors' wants than the company's standards of quality, took several ill-fated decisions that had far-reaching implications.
The most outrageous among them was Boeing's judgment to distribute core software development to low-wage workers in India. The idea of this move was to cut costs and inject diversity in the supply chain; however, it wound up achieving the opposite effect whose results included poorly written code that was directly involved in the accidents of two 737 MAX aircraft. The consequent grounding of the entire 737 MAX fleet cost the company billions and destroyed public trust in the brand of Boeing.
But it was not all about the 737 MAX plane, of course. Boeing's Starliner space capsule was designed to transport organizations to the International Space Station and has had a tumultuous history of delays and breakdowns culminating in NASA ending the contract with them and SpaceX coming to the rescue. These problems can be linked to a corporate culture that mainly concentrated on diversity and the environment rather than on stringent engineering practices that had once marked Boeing's brand.
The company's stock price conveys this story. Risk-capitalists who were able to recognize the early signs and that the stock would plummet had the benefit of making millions through shorting Boeing stock, which dropped from the 2019 peak of about $440 to below $100 in the year 2020 and never recovered its earlier highs.
Apart from the struggles the stock has encountered in recovering, consistent quality problems and the company's losing to competitors still keep the shares below their previous heights. Boeing's enthusiastic embrace of woke capitalism has given it more than only financial costs; it has taken lives and worsened the US's position in the aerospace industry. Boeing's embrace of DEI efforts and ESG ratings led it to ignore the engineering standards and strict quality control that made it globally recognized. The shift has not only put passengers at risk but also limited national security, which depends to a great extent on Boeing's defense contracts. The Boeing case offers a sobering example to both potential investors and executives. Firms that decide to chase after woke credentials abandoning their main goals erect a destructive path. For an alert investor, identifying firms imitating Boeing's wrong steps could end up with the bonus being able to profit in the form of a swift sale of stock. However, the general warning is certainly that companies prioritizing ideology over competence are in for a very rough ride as the as the market eventually punishes those who fail to maintain focus on their core competencies.
Potential Risks
While shorting companies overly committed to DEI and ESG initiatives can be lucrative, it's crucial to acknowledge the inherent risks in this strategy. The market is a complex beast, and even the most woke corporations can sometimes defy expectations.
One significant risk is the possibility of companies adapting to market pressures. Some organizations, when faced with backlash or financial strain, might pivot away from their most egregious woke policies. Take, for example, the case of Netflix, which, after facing subscriber losses, quickly backpedaled on some of its more controversial content decisions and even issued a culture memo emphasizing artistic freedom over employees' sensitivities. Such rapid course corrections can lead to unexpected stock rallies, burning short sellers in the process.
Consumer sentiment is another wildcard. The fickle nature of public opinion means that today's boycott could become tomorrow's cause célèbre. Social media-driven campaigns can shift rapidly, potentially rehabilitating a company's image overnight. Short sellers caught in such a sentiment swing could face devastating losses.
Moreover, the regulatory landscape is far from settled. There's always the risk that new government policies might actually favor ESG and DEI initiatives, potentially through tax incentives or preferential treatment in government contracts. Such changes could artificially prop up companies that would otherwise face market consequences for their misguided priorities. This risk is especially pronounced in the event of a potential Kamala Harris administration, which could prioritize progressive policies and push for even stronger support of ESG and DEI initiatives at the federal level.
It's also crucial to consider the power wielded by massive asset managers like BlackRock. Despite growing pushback, these financial behemoths continue to exert significant influence over corporate behavior through their ESG-focused investment strategies. Their ability to move markets shouldn't be underestimated, and they could potentially rally to support companies aligned with their ideological goals.
Misjudging a company's financial resilience is another pitfall. Some corporations, particularly tech giants, have deep pockets that allow them to weather prolonged periods of consumer dissatisfaction or operational inefficiencies. Underestimating a company's ability to absorb losses or its cash reserves can lead to painful squeezes for short sellers.
To mitigate these risks, prudent investors should consider several strategies:
Diversification: Don't put all your eggs in one short basket. Spread your bets across multiple companies and sectors.
Set strict stop-loss orders: Know your risk tolerance and stick to it. Be prepared to exit positions quickly if they move against you.
Focus on companies with clear, sustained negative trends: Look for persistent declines in revenue, market share, and consumer sentiment rather than reacting to short-term controversies.
Stay informed: Keep a close eye on regulatory developments and shifts in institutional investor behavior that could impact your positions.
Consider using options: Put options can limit your downside risk while still allowing you to profit from a company's decline.
Remember, the market can often be irrational longer than you can remain solvent. While the "Go Woke, Go Broke" phenomenon presents opportunities, it requires careful analysis, risk management, and a willingness to cut losses when necessary. In this high-stakes game of financial Jenga, only those with steady hands and steely nerves should play.
Key Takeaways
Betting against companies due to their DEI and ESG commitments involves navigating a complex landscape where financial returns intersect with social, political, and legal currents. Here's an expanded perspective:
Market Dynamics: The trend of companies facing backlash for prioritizing DEI and ESG over core business values isn't just a fleeting phenomenon but reflects a deeper shift in consumer and investor expectations. However, this shift is not uniform; while some sectors might see immediate backlash, others might benefit from these initiatives in the long term, especially if they align with genuine customer values or regulatory trends.
Consumer Behavior: Understanding consumer sentiment is key. While there's a vocal segment advocating for traditional values over woke capitalism, there's also a demographic that values corporate social responsibility. The challenge for investors lies in predicting which sentiment will dominate in influencing sales and brand loyalty.
Corporate Strategy: Companies adopting DEI and ESG might not always be misguided. Some genuinely integrate these values into their business model effectively, enhancing brand reputation and employee satisfaction, which can lead to better performance. Conversely, those that do so superficially or at the expense of core competencies are more vulnerable.
Legal and Regulatory Risks: The evolving legal landscape, as seen with recent Supreme Court decisions and legislative actions, adds another layer of complexity. Companies might face legal challenges or regulatory scrutiny for their DEI practices, which could affect their market standing.
Investment Strategy
For investors considering shorting based on DEI/ESG commitments, it's crucial to:
Diversify: Not all companies will suffer equally. Diversifying across industries and types of ESG commitments can mitigate risk.
Timing: Market timing becomes critical. Being too early or late in betting against a trend can lead to losses.
Research: Beyond financials, understanding corporate culture, consumer base, and regulatory environment is essential.
Risk Management: Given the potential for unlimited losses in short selling, strict risk management, including stop-losses and position sizing, is non-negotiable.
Social Media and Sentiment Analysis: Platforms like X provide real-time insights into public sentiment, which can be a leading indicator of market moves. However, this information must be critically analyzed for bias and representativeness.
Ethical Considerations: While there's a financial angle, there's also an ethical dimension. Betting against companies might align with personal values against woke capitalism but should also consider the broader implications on societal norms and corporate governance.
Long-term vs. Short-term: While short-term gains might be realized by betting against overzealous DEI/ESG commitments, the long-term impact of these initiatives on sustainability, innovation, and societal well-being might not be fully priced in by the market yet.
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