Lots of good investment and stock conversations last week here at Free Money Finance. Investment expert Fred Kobrick, author of The Big Money, was a guest blogger as well as question taker. It was lots of fun and very informative. My thanks go out the Fred for all his hard work and advice.
One topic that spanned a few posts was the subject of buying a stock based on the strength of the top leadership. The conversation started with a question from me, then went from there, and I thought everyone would be interested in it, so I've pieced the conversation together in this post. It starts with my question to Fred:
You talk a lot about the importance of management when considering a stock purchase. I've recently made two stock purchases where management was a big factor pushing me to buy. The first was Disney (DIS) and the latest was Home Depot (HD).
I'm currently thinking of buying JPMorgan Chase (JPM), again in part because of their leader. Jamie Dimon just seems to me to be the kind of get-things-done sort of CEO who is destined to perform well.
Can you comment on the following:
1. In general, how much weight you put on management (versus other factors) when you decide whether or not to buy a stock.
2. Specifically, your thoughts on DIS, HD, and JPM both as stock buys/no buys as well as the skill (or lack thereof if you think so) of their top managers.
Here's how Fred responded:
On the importance of management, let me start with this quote from my book, keeping in mind that with the four factors (BASM) that identify the greatest wealth stocks, management is responsible for them, starting with a great business model:
“This is one of the most important chapters in this book, and for some people it will be the most important. For some, picking stocks on the basis of management will be all they need to do.”
This begins the chapter on management but I would urge people to keep reading and see what the characteristics of great managements are. Remember, BASM guides the investor to find the great companies very early, and BASM is the golden goose that lays those golden eggs of earnings.
Thus, if you only define a great management by its earnings track record, you will come into the stock much later than some others, and it may be a very good investment, but not a “Big Money” or wealth stock to make you rich for life.
So, with the 3 companies you name—Disney, Home Depot and JP Morgan, I have met all these managements and think very, very highly of all three.
There are two things that are important to know, here.
First, they are all big and so while they are going to be good investments over time (not quick trades), they are not going to make people rich for life in my opinion. They already did that, and the first two are detailed in my book as stories with lessons as to how they did that and how people recognized them early.
JP Morgan is over $80 billion in revenue on its way to $100 billion, and even more than that—the second thing—it does not control its destiny as much as the other two stocks.
I say in my book The Big Money that the amount of control over destiny a company can have vs. the amount that its destiny is controlled by the economy or outside factors, is a degree of how great it can be. JP Morgan is very good and will do well for investors, but it is subject to changes in the economy and interest rates more than the average company and one needs to understand that.
Also, JPM is up over 32% the past 12 months, and is somewhat expensive relative to its own historical price earnings ratio, while analysts on Wall Street see growth for the next 12 months to be somewhat slower than the last 12. So, just know that.
This led to another (related question) on a separate post, where I got a question on the same topic:
Hi FMF. How does one exactly go about evaluating the executives of the company? The things that you listed are somewhat subjective. How does one tell a crook from a visionary, especially when you are not very familiar with the industry? I'm interested in whatever that you could elaborate further. As on how I do it, I just go by financial numbers.
Here's how I responded:
There's not a single method, but I can describe how I came to believe in the three leaders I noted on Fred's other post.
With Disney (DIS), I detailed my thoughts pretty much in this post. In short, Steve Jobs has made me a ton of money on two separate occasions and he seems to have the magic touch. I think he'll do it again with DIS.
With Home Depot (HD), I've followed Nardelli since he "lost" the race at GE. Often a smart guy spurned is a powerful force -- he's out to prove something -- so I've watched him. Recently, the fundamentals of HD were attractive. I then read a positive story in Business Week (and listened to their behind-the-scenes podcast) and it reinforced much of my thinking about HD. So, I took the plunge.
With JPMorgan Chase (JPM), you've got the "smart guy spurned" issue working again. In addition, I did a bank deal at my last employer just at the time when one of the banks we were considering merged with Dimon's bank. The execs I was dealing with had met with Dimon and said he was the "real deal". His performance since then seems to back up their feelings, and while I haven't purchased JPM yet, it's on my short list.
As a follow-up, last week Disney reported a 12% increase in profits and garnered these comments from Money Central:
Disney has enjoyed a revival ever since Robert Iger officially assumed the role of CEO from Michael Eisner back in September 2005. The stock is up roughly 31% over this period, compared with a gain of 11.7% in the Dow. Based on the solid performance in the second quarter, there's no reason to think that the glitter will come off Disney any time soon.
Iger has done an excellent job so far of refocusing and revitalizing Disney. Even with the stock up 31% over the past eight months, Disney still trades at only 20 times estimated earnings, a considerable discount to the industry.
Based on an industry multiple of 25 times earnings, Disney has the potential to rise to $37 or $38 over the next six to 12 months.
Oh yeah! And this is even BEFORE Jobs gets a chance to impact DIS. Looks like good times are coming to the mouse (and me too). :-)
Update (7:20 am): Just saw another post on Disney -- looks like more good news!
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