Qualitatively Analyzing the Company
Instead of looking at the financial statements right away, let’s take a look at ways to measure the qualitative value of a company.
The first thing to ask when qualitatively analyzing is “what is the company’s business model” or “how does the company make money.” Perhaps the easiest way to get a direct, forward answer is by checking out the company’s website or reading the first part of its 10-K filing. Some business models are easy to understand, such as selling cookies, but others can be much more complex.
If nothing else, an investor should at least understand the business model of the company he/she invests in. Warren Buffett, regarded as one of the wisest investors of our day, rarely invests in companies within the technology sector because most of the time he doesn’t understand them. The technology sector isn’t bad; Buffett simply doesn’t feel comfortable investing in this particular industry. If you don’t understand a company’s business model, you won’t know what will drive future growth.
Competitive advantage is another key thing to consider since a company’s long-term success is mainly driven by its ability to maintain a competitive advantage. Microsoft’s domination of the personal computer operating system is an excellent example of a company keeping competitors at bay and continuing its own growth and profits. Only by achieving a competitive advantage can a company’s shareholders be well rewarded for decades.
It has been said that management is the most important aspect for investing in a company. So how does an average investor go about evaluating the management of a company? After all, unless you’re a fund manager interested in investing millions of dollars, that’s little chance you can even schedule a face-to-face meeting with the upper management of a company.
Nearly every public company has a corporate information section on its website. Within this section there is usually a quick biography on each executive detailing their employment history, educational background and any applicable achievements. But this is only the beginning of your research. You’re not only looking for competency, but also for dirt and no company is going to put negative information on its corporate website.
Here are a few ways anyone can get a feel for a company’s management team:
1. Conference Calls
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) usually host shareholder conference calls, although other executives will join them as well. Most of these conference calls begin with an overview of performance and plans for the future. What is really interesting is the question-and-answer portion of the call that occurs at the end. This is when analysts call in and ask direct questions. The answers received can be quite revealing about the company. It’s also to pay attention to how they handle the questions. Do they avoid questions or do they provide forthright answers?
2. Ownership and Insider Sales
Just about any large company will compensate executives with a combination of cash, restricted stock and options. While there are problems with stock options (See Putting Management Under the Microscope), it is a positive sign that members of management are also shareholders. The ideal situation is when the founder of the company is still in charge. Examples include Bill Gates (in the ’80s and ’90s), Michael Dell and Warren Buffett. When you know that a majority of management’s wealth is in the stock, you can have confidence that they will do the right thing. As well, it’s worth checking out if management has been selling its stock. This has to be filed with the Securities and Exchange Commission (SEC), so it’s publicly available information. Talk is cheap – think twice if you see management unloading all of its shares while saying something else in the media.
3. Past Performance
Another good way to get a feel for the management is checking to see how executives have done at other companies in the past. Although the biographies on corporate websites may sound exciting, the whole truth can be surprising sometimes. To do a background check, check the companies they worked at in the past and do a search on those companies and their performance. Also take note of the reasons previous positions were given up, especially if a previous position was much higher than their current status.
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