Tracy Krohn is the founder and CEO of W&T Offshore (NYSE:WTI), an oil and gas exploration firm that operates in the Gulf of Mexico. Krohn is a billionaire -- he turned his $12,000 business into a $2.8 billion public company, of which he owns more than 60%.
More important for you and me is that Krohn has delivered 160%-plus returns for his shareholders since W&T's February 2005 IPO. So the man who turned $12,000 of his own cash into $2.7 billion also turned a shareholder's $1,000 into more than $2,600.
When he talks, I listen
At last week's Burkenroad Reports conference at Tulane University, I had the opportunity to see Krohn make a presentation about his company's future, and I ate lunch with him afterward. It struck me that Krohn is a prime example of the type of leader we search for every day at our Motley Fool Hidden Gems small-cap service.
When hunting for small-cap stock investments, we look for founders or CEOs (or both, ideally) who:
- Own a substantial stake in the business,
- Act in the interest of shareholders, and
- Possess a ton of entrepreneurial spirit.
We search for these traits somewhat on principle -- we want to be able to trust the leaders of companies we partly own -- but also because the presence of such a business leader correlates highly with outsized returns.
The means to make money
In his presentation, Krohn was candid, self-deprecating, humble, and able to explain his company in plain English. He discussed his company's recent acquisitions, plans to maximize shareholder value, and commitment to repaying loans as soon as possible.
Now, I'm no expert in geology or in the oil and gas exploration business. I've never invested in a pure-play driller because I know that there are plenty more folks out there who know a heck of a lot more about the business than I do. That said, after meeting Krohn, I'm not surprised that he's built a wildly successful business. He seems to possess all of the traits that I've been trained to look for, including the three mentioned above.
The importance of leadership
I can't say for certain whether W&T Offshore will be a great investment going forward -- although given the company's natural gas reserves and the current price of natural gas, it is easy to predict profits. Krohn was also optimistic about the potential of the reserves that W&T recently acquired from Kerr-McGee (NYSE:KMG).
What I can say for certain is that to separate great companies from the mediocre ones, investors need to take a close look at company leadership: the CEO, the board, and senior management. Do they tell the truth? Do they act in the interest of shareholders? And maybe most important, do they have what it takes to win?
A close analysis of management is a particularly crucial task for small-cap investors. Although small caps offer some of the best returns on the market, a few management decisions can make the difference between bankruptcy and market-beating returns.
It wasn't luck, for example, that separated Michael Dell of Dell (NASDAQ:DELL) from Ted Wait of Gateway (NYSE:GTW). And when Jeff Bezos' parents invested in Amazon.com (NASDAQ:AMZN), they may not have known from a business standpoint why it would so thoroughly outperformBarnes & Noble (NYSE:BKS). They knew their son, however, and they've said that they were more than willing to invest in him.
The Foolish bottom line
At a market cap of $2.8 billion, W&T Offshore is a little too big to be considered for our Hidden Gems small-cap newsletter. Although had we been locked in to Krohn early last year, his $1 billion concern would have satisfied much of what we look for to recommend a stock. Fortunately, there are no called strikes in investing. We may have missed Krohn when his company was small, but we certainly don't miss them all.
We're on the lookout every day for the world's best small companies and the world's best business leaders at Hidden Gems, and when we find them in tandem, we lock in on market-beating returns.
One of Fool co-founder Tom Gardner's more interesting recent finds was Richard Woolcott of Volcom (NASDAQ:VLCM). Woolcott founded Volcom after a career as a surfer. He owns more than 15% of the company's stock, and he has successfully built a brand of apparel that young people identify with and want to wear.
Volcom is up more than 15% since Tom recommended it a few months ago, but we don't get too worked up over short-term returns. Rather, we concentrate on the long term, and since July 2003, our recommendations have returned 43% on average, versus 15% by the S&P 500. Click here to learn more about a free 30-day trial to the service.
Tim Hanson does not own shares of any company mentioned in this article. Dell and Amazon.com are Stock Advisor recommendations. Dell is also an Inside Value recommendation. No Fool is too cool for disclosure ... and Tim's pretty darn cool.
