More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.

It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.

Next up: ReachLocal (Nasdaq: RLOC). Is the executive team of this provider of localized advertising services doing all it can to earn you outsized returns?

Foolish facts



CAPS stars (5 max) ***
Total ratings 74
Percent bulls 94.6%
Percent bears 5.4%
Bullish pitches 10 out of 10
Highest rated peers China Mass Media, Omnicom Group, Interpublic Group

Data current as of April 2.

ReachLocal is too new for Fools to have formed a definitive opinion. They want to like its buzzword-compliant name and business model -- local advertisers! increased reach! -- but they're fearful the company lacks any advantage in a digital ad market dominated by Google (Nasdaq: GOOG) and Yahoo! (Nasdaq: YHOO).

Recent forecasts have also fed bearish fears. Shares of ReachLocal fell as much as 17% on Feb. 16 after management called for less first-quarter revenue than analysts were expecting. To be fair, the miss was minor: $83 million to $85 million versus the $86 million the Street had been calling for.

Skittish investors nevertheless fled ReachLocal for display ad peer ValueClick (Nasdaq: VCLK), whose shares popped more than 16% on the same day. Management's upbeat guidance fed the rally. But it was short-lived. Both stocks have taken a turn for the worse since mid-February, badly underperforming the S&P 500.

Yet the freefall says little about the overall health of digital advertising in general -- and localized advertising in particular. Researcher BIA/Kelsey says the market for localized digital ads is on track to grow 14.4% a year to $42.5 billion by 2015.

Interestingly, ReachLocal has already been growing much faster than that. Revenue is up more than 43% over the past year, to $291.7 million, or a fraction of the $21.7 billion in overall market revenue BIA/Kelsey tracked during 2010.

At Motley Fool Rule Breakers, we expect ReachLocal's technology and existing customer relationships to drive increases in its share of the local online ad market. The company's platform connects to every major ad network and, via an exchange, brings in big sites that also sell ad space. Historical data helps to optimize campaigns, while proprietary technology tracks leads from the first click or call.

Management overview



Cash Compensation

Shares Owned*

Zorik Gordon, co-founder, CEO, president 8 $889,095 1,617,520
Nathan Hanks, co-founder, chief distribution officer 8 $1,186,242 223,722
Michael Kline, co-Founder, chief operating officer 8 $628,208 417,171
Ross Landsbaum, chief financial officer 3 $429,926 0

Source: Capital IQ, a division of Standard & Poor's. Data current as of April 2. Gordon's stake includes 1,617,520 shares owned by the Gordon family trust. Hanks' shares held by Digital Media Distribution, where he is the managing director. Ownership data for Kline and Landsbaum calculated by Capital IQ.

It's a compelling vision, right? As All-Star CAPS blogger latimerburned points out in this post, there's a large contingent of small businesses that want to reach consumers where they're browsing. Doing so only makes sense; I haven't picked up a Yellow Pages book in years.

Incentives are where the story gets tricky. ReachLocal has been public for less than a year. While the table below shows a healthy chunk of the business still owned by the insiders, that 14% includes a 4.25% stake controlled by investor Elisha Gilboa of Las Vegas-area investment holding company AVTZIM. ReachLocal says in its S-1 that Gilboa is a former director of the company.

Among the executive insiders, only CEO Zorik Gordon owns a good chunk of the business, and virtually his entire stake is squirreled away in a trust. That's not necessarily bad; it's just that I expected to see lower salaries and higher direct holdings among the company's co-founders.

Management analysis versus competitors


Insider Ownership

Gross Margin

Return on Capital

Return on Equity

Constant Contact (Nasdaq: CTCT) 3.05% 70.8% 1.4% 2.5%
ReachLocal 14.05% 45.5% (12.4%) (18.0%)
ValueClick 3.57% 72.9% 13.2% 18.3%
Yahoo! 9.37% 58.5% 4.1% 9.8%

Source: Capital IQ, a division of Standard & Poor's. Data current as of April 2.

Finally, it's in a comparison with peers where the ReachLocal story begins to break down. Though revenue is growing and cash is flowing -- and has been since 2007 -- management hasn't demonstrated expertise at deploying resources. Returns on capital aren't just negative; they're worse than they were a year ago. Not good.

For investors, this creates a dilemma. Buy shares of ReachLocal on the promise of capitalizing on the opportunity local online advertising presents, or wait to see if this would-be disrupter becomes the disrupted. With the rise of Groupon, that's a distinct possibility.

Do you agree? Disagree? Let us know what you think about ReachLocal's products, strategy, and valuation using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email or replying to me on Twitter.

The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive up-to-date news on companies like ReachLocal, or any of its competitors. To get up-to-date ReachLocal news and analysis, add the company to your watchlist today:

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.