Fisher Point #9: Depth of Talent
Does the company have depth to its management?
Just like well-run governments have presidents and deep cabinets, so too public companies must have a depth of leadership talent. A superior CEO must have very, very strong leaders in the background, each leading his or her own departments with vision and a pair of big, active ears.
Probably the most prominent example of a CEO successful in this regard is General Electric's
As a counter-example, recent executive departures from software company Oracle
For more examples of great management, check out Why Great Managment Matters from the Fool Research Team.
Fisher Point #10: Mathematics and Consistency
How good are the company's cost analysis and accounting controls?
As you explore a company in greater detail, you'll want to get a sense of how closely they follow their own performance numbers. If a company reports 50% gross margins one year, for example, then 28% the next year, followed finally by 39%, then you have a company drowning in inconsistency. That's not good. The best companies show very steady numbers whose direction is steadily improving.
Examples of companies successful at this include General Electric, Cisco Systems
Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
While this point is a mouthful, and a bit of a "catch-all" as Fisher himself admits, here he is simply talking about performance measures and other things that might be particular to individual industries. For example, investors in biotech and pharmaceutical companies should know how many patents their companies hold on drugs they have developed, and how much longer they will last. Also critical is what potential drugs a company has in clinical trials.
Other examples include same-store sales, a critical measure for retail companies that indicates how well stores that have been open for at least a year are doing. This enables the investor to see through any growth a retailer might be achieving simply by opening new stores. Anytime you are exploring a company in a new industry, you should keep an eye out for these kinds of unique metrics.
Fisher Point #12: Long-Term Aims
Does the company have a short-range or long-range outlook in regard to profits?
This point is not so much concerned with growth as it is with a company's mindset. Is it willing to take short-term profits at the expense of its longer-term financial health?
For example, plenty of companies have recorded strong sales growth, but failed to diligently monitor and collect on those sales, leading to significant increases in accounts receivable. Companies engaged in "managing earnings" this way, which some have argued that Lucent Technologies
Fisher Point #13: More Than Enough Cash
Will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will [dilute existing shares]?
It's wonderful to see tremendous growth in sales for a company, but profits are the ultimate aim. Recently, far too many companies went public that needed far too much financing to get them out of the debt cycle. And, the pressure on management at public companies in need of financing is overwhelming. It can cause them to strike poor business deals and sign weak financing plans in a desperate effort to get out of trouble. This is not a virtuous cycle.
Fisher's point here should not be taken lightly. If a company must issue new shares to obtain additional cash for expansion, it will dilute the value of current investors' shares. Profitable and expanding companies that have loads of cash, and limited or no long-term debt, can expand without this dilution. Remember, there's not enough cash and opportunity in the whole world to support a limitless number of great companies. You'll have to look for the ones with heavy cash reserves alongside wide-open future opportunities.
This is what makes Yahoo!
Fisher Point #14: Full Disclosure to All Investors
Does the management talk freely... when things are going well, but "clam up" when troubles and disappointments occur?
When the going's good, everyone -- from management to shareholders -- is all smiles. But, oh, how quickly bad news can change that. Take Coke. Here's a company that prided itself on being open with investors. Roberto Goizueta, the former CEO, actually required that shareholders be called "stakeowners." He believed Coke's investors held much more than a slip of paper. During the reign of Roberto, for more than a decade, small investors were able to get all their questions answered. But, after Douglas Ivester took over in 1997, and troubles hit in Asia and Europe, the company clammed up. (Ivester has since been replaced by Douglas Daft).
Disclosure is a must at great companies. Investors should ensure that companies they are researching make as much information as possible available on the Internet, including quarterly earnings calls, other presentations, press releases, and SEC filings. Many companies have begun email services that will alert you about their latest news: consider asking companies that don't to add this service, or any others you find convenient.
Fisher Point #15: Uncompromising Integrity
Does the company have a management of unquestionable integrity?
Honesty and integrity are what all employers look for when they want to hire a new employee. So, why shouldn't we look for the same thing from the executives at companies we invest in? Particularly important is integrity in accounting statements.
Certainly the most prominent recent example of what happens when a company is forced to adjust its accounting is last year's blow-up of MicroStrategy
In addition, remember that MicroStrategy did nothing illegal; they simply engaged in questionable accounting. As a result, investors cannot rely on regulators to catch the MicroStrategies of the future. Instead, the experience of that company's shareholders illustrates the most basic investing principle, even more fundamental than the 15 Fisher lays out: buyer beware.
For more information on Fisher's 15 points, check out Common Stocks, Uncommon Profits.
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