This article was originally published on the GeoInvesting website.
GeoInvesting LLC specializes in the delivery of high quality content on microcaps and smallcaps. Since its creation, GeoInvesting has built its reputation on its selection of “GeoBargains”, a group of stocks meeting a set of specific criteria allowing them to perform better than their peers. To find out more about the services offered by GeoInvesting, please visit their website: GeoInvesting Arbitrage.
When researching a microcap company, nothing replaces an interview with the company’s CEO and/or CFO. Often, management is willing – and is even anxious – to talk to analysts and investors to get their company’s story out. Engaging in meaningful dialogue with management, however, takes preparation and an organized approach. In the end, it is a rewarding process that helps you develop a feel for your current or potential investment in the company.
The GeoTeam uses a direct and professionally assertive approach to management interviews. First, we identify and research the background of the target manager (CEO or CFO) and attempt to reach them directly. Once contact is made, we quickly establish our credentials and credibility by telling them who we are and what we do, how we learned about the company, and that we are working on completing our due diligence process. We demonstrate that we are serious and have done our homework by being specific about what piqued our interest and that we are either already invested or are contemplating initiating a position. Investors can be good – or great. Great investors know how to talk to management. It can be the most important part of our process — the icing on the cake. Once dialogue is established we find the following topics and questions to be most effective. Try to reach the CEO/CFO and not IR.
1. Background & Recent History
Schedule your interview and come prepared with written questions before you interview a company. A shotgun interview process is rarely effective until you have mastered the art of the interview. The more you know about company the better you will be received.
- Ask management to describe the key businesses and segments’ revenue, margins and operating income.
- Where is the company in its margin cycle?
- What are the key opportunities and challenges facing the company’s business segments?
- Get a feel for the competitive landscape. What competitors do they respect?
- Always ask them to describe their most challenging period and how they met the challenge.
2. Revenue and Earnings
In the end, revenue and earnings per share are what drive stock valuations. Here, you peel back several layers of the company’s proverbial onion and gain insight into the factors that will ultimately affect revenue and earnings.
- Address the recent revenue and earnings history (three to five years) and macro trends.
- What is more important to management— sales or earnings? We are looking for companies that place emphasis on profitable growth, not just growth to gain market share.
- What are the company’s geographic footprints?
- How is capacity utilization being maximized and how is it currently affecting the bottom line? A company that is at near full capacity may have to raise capital soon.
- What are the expansion plans for each business segment?
3. Margins and Earnings Power
Once rapport is established, you should feel a little more comfortable with expanding your inquiry into what really drives the earnings power of the company. Confidently drill into business segments to get a feel for pricing and costing issues and challenges.
- Is seasonality a material factor in quarter to quarter performance?
- What are management’s goals regarding margins and peak operating performance?
- Which company segments are expected to outperform the others, and will there be an increasing emphasis on developing these segments?
- What are the biggest challenges facing the company that may limit its ability to maintain healthy margin?
- What inning of the margin improvement cycle are you in?
- How does a company compare to other comps in terms of margins? If their margins are lower, inquire what they believe they can do to approach and even exceed industry margins. Sometimes companies target different areas of the market so find out if a company is targeting the higher-margin area. Sometimes thinking like a contrarian when looking at margins is the best way to go. Consider buying the company with the weakest margins that you think has a good chance of improving margins and lots of earnings growth in the future, based on your exchange with the executive.
- If margins are at or above industry standards, can they maintain the margins?
It’s a good idea to delve into the company’s liquidity and capital resources. Using this strategy will help you assess some of the capital-raising dilution risks associated with your potential investment. In the absence of revenue growth, dilution can limit the valuation of the stock in many cases.
- Is the company adequately capitalized?
- Is working capital sufficient to fund operations and growth initiatives?
- Are there any plans to raise cash through debt or equity offerings?
- What dilutive impact will employee stock option plans have?
- What dilutive instruments are outstanding such as warrants and convertible debt?
5. Analyst Coverage
It’s always a good idea to discuss analyst coverage. Sometimes, smaller companies have a harder time getting noticed due to the overall lack of visibility in the market, but it’s possible that they have coverage that the market has not noticed.
- Does the company currently have analyst coverage?
- If yes, do the analysts work closely with the company or are they rogue analysts coming up their own estimates without input from management?
- Are published analysts estimates reasonable?
6. Acquisitions/Being Acquired
Often, the prospect of a company being acquired can be an exciting notion to investors since transactions like these have the potential to assign an attractive premium on the share price of the stock.
If you have a feeling that there may be opportunities for potential suitors to make a bid, it is a good idea for you to cover it in your conversation with management.
On the flip side, a company that makes acquisitions gives valuable insight into its eagerness to develop lucrative business segments that align with their growth strategy and investors’ interests. Acquisitions are great ways for micro-cap companies to grow, but the wrong acquisitions can be devastating. So, it’s important you understand if management has a clear vision of how to integrate the acquired company into its operations. Have they had success in the past in growing through acquisitions?
- Are acquisitions a key part of the company’s growth strategy?
- Would management insist on any transactions being immediately accretive?
- How would the company pay for acquisitions — cash, debt or equity, or combination?
- Would the company consider being acquired in the right circumstances?
7. Concluding Questions
Top performing companies can grow revenues at 10%-15% and EPS at 25%-30% over the next 12 to 18 months. You can come out of an interview with a good amount of confidence if you establish whether the company can achieve those rates of growth.
Other parting questions can help you get an idea about the company’s dedication to keeping investors’ confidence and in the company’s intention to maximize shareholder value and maintain a realistic view on its future.
- If listed on the bulletin board or another lesser exchange, inquire if the company has plans to up-list to a major exchange.
- Are there any legal issues or other challenges that could throw the company off course?
- What most excites management about the company’s prospects and what risk factors keep them up at night?
You Can Conduct a Great Interview
Perfecting the interview script can take some time but in the end, it is worth it. Going through this process is imperative for gleaning as much from a company as you can to complement your research from conference calls, press releases, shareholder letters and regulatory filings.
Keep in mind:
- It’s possible to establish rapport, but it takes time, and possibly several calls.
- Investment credentials are helpful, but not required.
- CEOs have limited time to speak – you must get your points across quickly.
- Don’t be afraid to call. Take a deep breath, relax and have fun.
Do you want to have a conversation about this subject with Maj Soueidan, co-founder of GeoInvesting? He’d be happy to have a personal one-on-one on how he navigates an interview with company management. Contact us here to request a call.