Posted by: sanjayshetty | October 23, 2007

The numbers look good, what next?

So you’ve figured out the numbers and feel that the company is available at a discount to it’s intrinsic value. When numbers look good, it typically means the company could potentially have a good moat. However as you might or might not know, quite a few companies are good at manipulating those numbers to make things look good. A longer period view of the numbers helps here, such as over a period of 10 years. However, there are critical next steps one needs to take before taking the leap and buying the company’s stock.

Management

How truthful are they? Read the annual report of the company, listen in on the conference calls or read the transcripts. Look at whether the CEO is informing you about the challenges that lie ahead and what really happened in the past year, is he honest in mentioning things which worked or didn’t or is it just verbiage. Is the CEO owner driven? Or is he just interested in a huge salary for himself? You’ll find it surprising, often the company is losing money like crazy and the CEO is being compensated phenomenoally well. So make sure you pick up those annual reports and google the management team, especially the Chariman and CEO. 

Things to watch out for

Has the CEO/Management changed recently?

For some kinds of companies this may be the event to change their fortunes, and for you to walk away, e.g. when Steve Job’s left Apple, the great company somehow lost steam, it was only when Job’s got back into the driving seat that wonderful things started to happen.

Ref 1: Pay for Performance – http://www.faireconomy.org/research/PayforPerformance.html,
Ref 2: Conference Calls: http://www.seekingalpha.com/, http://opencompany.info/
Ref 3: Reading Conference Calls: http://philtown.typepad.com/phil_towns_blog/2005/12/how_to_read_a_q.html

Insider buying/Selling

One thing you need to check before the buy decision is whether Insiders are buying/selling their stock. If there are lots of them selling the stock it usually is not a good sign.(they know much more than you and if they feel the price is good enough to sell, then you better be careful.)  There are times when insider selling might not be a bad thing, the insiders might just be redeeming their stock options and making what’s due to them.
Ref 4: http://philtown.typepad.com/phil_towns_blog/2005/11/when_insider_se.html.
Ref 5: http://moneycentral.msn.com/investor/invsub/insider/trans.asp

Is the MOAT waning due to New Competition/New Technology

A company might be doing wonderful on the back of a wonderful drug which they have a patent for a x number of years or a technology which is unique today, however things change. E.g Garmin is considered the market leader for GPS devices, I quite like the company, it has great numbers, a good management/CEO. However, in recent times, more and more mobile phone’s are packing in feature after feature and especially GPS related features in to their mobiles. This makes me wonder if Garmin will be able to maintain it’s leader status and gaurd it’s MOAT. I feel in the long run the increasing competition might cause it to loose quite a bit of marketshare. I don’t know how long that will be, nor can I predict how popular the inbuilt GPS functionality mobiles will be popular, to pose a threat to Garmin. So it’s kind of a company which is in my I love it tray, but….  I’m not certain if I’m going to keep on loving it. A similar story, in the Indian market, Bisleri (a bottled water product from the Parle company which, has a phenomenal mind share(brand) and a first mover advantage. In India most often when a person asks for bottled water, he/she just says give me a Bisleri. However in recent times, the number of companies who have entered the market is kind of huge (Over 100 brands vying for the bottled water market). A good company today is no gaurantee of being good tomorrow, it definitely has a better chance, but when you’re thinking of buying one, you need to research to see if there is change in the air, either in terms of alternate technology, too much competition etc.

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Responses

  1. Nice articles. Keep it up!


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