It's easy to get carried away with anecdotal "evidence" -- like the widely held notion that Internet usage has doubled every three months. Nonetheless, anecdotal and qualitative information can be a huge investment edge for intelligent Fools.
Investors often shun or ignore non-numeric pieces of information. After all, you can't just plug that data into a discounted cash flow model. Observations like "management uses secondhand furniture, so it seems like a good steward of capital" don't readily mesh with spreadsheets and statistics. However, I often think that these pieces of information -- investing X-factors, as I call them -- can make or break your rationale for investing in a particular company. Here are a few of my favorite X-factors.
The "I'm sorry" factor
If love means never having to say you're sorry, then love has no place in the investment world. Investors should read through five or more years of a chairman's annual letters, or look at conference call transcripts, with an eye toward the firm's toughest years. When the company does not meet its targets, its executives' response to that failure should be the telltale sign of whether management holds itself accountable.
Some managers simply own up to such failures, explaining exactly what went wrong and taking the blame. The Q2 2006 earnings call for Chico's FAS
Although Chico's is currently in a rough patch, the company enjoys one of retail's highest sales-per-square-foot metrics, between $900 and $1,000. I think that speaks well of its management's accountability.
The "How many managers does it take to screw in a lightbulb?" factor
I once studied a restaurant company that employed a CFO, a director of investor relations, and a vice president of investor communications -- despite sporting a market cap of less than $500 million. I have no idea why such a small company would need so many layers of management. Unsurprisingly, shares of this wasteful company have lagged for more than five years.
Conversely, I become very interested whenever I spot ultra-lean management structures. One obvious example would be Inside Value selection Berkshire Hathaway
Other efficiently managed companies include Contango Oil & Gas
The "eye on the ball" factor
Wasteful companies will inevitably find even more ways to erode shareholder values. For example, at the laggard restaurant company I mentioned above, I noticed that the company spent years doing million-dollar consulting studies about how satisfied guests spend more than unsatisfied guests.
Call me naive, but I don't think you should have to pay big bucks to a team of consultants to figure out that satisfaction leads to better sales. Furthermore, I was distressed that the same managers who spent lavishly on detailed studies never seemed to understand why their profits stayed so stagnant.
In contrast, I think the management team at CKE Restaurants
Foolish final thoughts
Remember, Fools -- numbers aren't the only useful facts available when gauging a company's merits. They may be subjective, but I believe that X-factors like these can give Foolish investors a serious edge in the stock market.
X marks the spot for further Foolishness:
Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool's disclosure policy looks for X-factors with its X-ray specs.