We've often advised investors to look at the quality of management when evaluating a company as a possible investment. (We've also pointed out that another good sign is when a company doesn't lavish its CEO with riches.) Of course, it's not always easy to judge the quality of a company's executives. That's one reason our Motley Fool analysts are often visiting companies or speaking with corporate bigwigs in other ways.
But you typically can't just walk up to a corporate office and ask to chat with the CEO. So what can you do? Well, one sign of effective management is, simply, solid results. If a company's revenue and earnings are all over the place, or if they're falling, there's a good chance that management doesn't have things under control. If they're growing steadily, that's a green flag.
Smooth earnings can be good, too, but the Bernie Madoff debacle offers us a warning to be wary when growth is too smooth. In good market environments and bad, Madoff's results didn't waver very much. The stock market has gone up over many decades, but along a jagged line, not a steady slope.
You should also look for candor in a CEO's annual letters to his or her shareholders. According to University of Michigan Business School professor Fiona Lee, when a company's leaders take responsibility for a lackluster performance, its stock will tend to rise in the coming year. "Shareholders have more favorable impressions of companies if their managers accept blame for negative performance," Lee explains. She also suggests that taking accountability suggests that the company is in control of its destiny, and not just being tossed back and forth on the market's waves.
A study last year by Rittenhouse Rankings rated companies based on their annual reports. Wells Fargo
So as you study companies, check to see whether they're blaming poor performance on their own shortcomings -- and whether they have plans to fix those problems -- or whether they're pointing to external factors out of their control, such as the poor economy. This year, the economy will surely affect many companies, but so will their own strategies and executions.
For more on investment research and trends, read about:
Fool co-founders Tom and David Gardner know how to research stocks. Right now, they're positioning readers of their Motley Fool Stock Advisor newsletter service to take full advantage of the many opportunities in today's markets, with their market-beating stock recommendations. See the latest from the Gardner brothers today with a 30-day free trial.
Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola and Novartis. Coca-Cola is a Motley Fool Inside Value recommendation. Try our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.