Separating the zeroes from the heroes
When investing in a stock, it is vital to ensure that the company’s management is doing its job properly and in an ethical manner. This week, gives you some tips on how to gauge a management team’s performance.
last week I wrote how I had sold my MTN shares after the company allowed pricesensitive information (the $5.2bn Nigerian fine, amounting to about R71.3bn) to be in the public domain for hours before issuing a Sens announcement. In this case I saw the story on Twitter early on the morning of 26 October, a Monday, and the originating article had been online since Sunday afternoon. Yet MTN only issued a Sens after 2pm on Monday.
Many have accused me of responding in a knee-jerk way while others say it was an emotional response. They may be right, but I have a simple rule: I want to own outstanding companies and as a matter of course they must have outstanding management that always acts ethically. Issuing a Sens announcement five hours after the market opened is neither outstanding nor ethical.
To my mind, selling MTN was an easy decision, but spotting less-than-outstanding management is usually much harder. Profits may be growing and the company seems to be doing well, which certainly points to competent management. But it does not indicate outstanding management. What are they expecting, what challenges and what successes? Then as you continue to read forward you see if they were largely correct in their assessment. They are never going to be 100% spot on. But do they have an understanding of what will happen in the company’s immediate future and do they have a good plan for dealing with it? An outstanding management team should have at least five years of operations mapped out, so the challenges for the next year should be pretty much known to them. Those companies that communicate frankly with shareholders about the challenges, and are mostly right about them, show signs of outstanding management.
When evaluating a company’s management, something else to look out for is unexpected problems that negatively impact profit but seem to crop up constantly. Examples would be currency loss, inventory issues, insurance problems, major theft or even fires at the plant/ offices. In short, a litany of issues that always seem to bedevil the company and hit profits. This is not bad luck – it shows a lack of outstanding management. Lastly are deals that are simply just dodgy. A few years back, a listed company reported a property deal a year after the event. In this deal, the company had bought properties for its operations, except every property had been bought from one of the directors. Why the year-long wait? Management then went on to say that it didn’t know the company had to issue a Sens announcement. Aside from that being nonsense, it was suspect that some six properties were bought across the country and every one from a director! Make no mistake, the company identified the properties, the directors then bought them, added a markup and sold them to the company.
I sold the stock immediately and it then proceeded to increase in value some five-fold over the next few years before collapsing to a third of my exit price. This is important: just because a company has lessthan-outstanding management doesn’t mean the stock can’t move higher. However, it does put the long-term sustainability of the stock’s rise at risk and, more importantly, I don’t want second-rate managers or crooks running the companies I own, regardless of whether they make money or not.
A final and important point: know what matters to you and your investments and stick to your guns. Investing is not only about profits; it is also about doing it ethically.
To my mind, selling MTN was an easy decision, but spotting less-thanoutstanding management is usually much harder.